Apple Q1 earnings preview: Spotlight on China, 5G, Wearables, Services
Apple (AAPL), which reports fiscal 2020 first quarter
earnings today after the close, has declined somewhat from its all-time highs
in the last couple of sessions, but the stock is still up by around 100% since
its profits warning a year ago. Over that time we have seen a massive rerating in the stock despite fears iPhone
sales are not going to be what they once were. This is largely down to one
thing – Services. But there is also a sense that iPhone sales are going to
be materially higher than feared a year ago, and with the 5G refresh cycle
promising to be a super-cycle, there is plenty of fundamental support for
shares to be trading where they are.
Q1 earnings per share are expected at $4.55, from $4.18 a
year before, on revenues of $88.4bn, from $88.3bn a year ago.
At the time of its Q4 19 release, Apple guided revenue
to be between $85.5 billion and $89.5 billion, with gross margin between
37.5% and 38.5%.
Momentum coming into this quarter is positive
– Apple posted record Q4 revenues despite slower iPhone sales and
guided for a very strong holiday quarter. Earnings per share beat handsomely at
$3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to
On a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from
around 11 last year. The Services-led re-rating may have already happened,
although there could yet be a little more upside.
Q1 Key themes
investors will pay close attention to what management have to say about the
impact of the virus on demand in China, as well as on operations/production.
Apple may have to revise its Q2 forecasts for Greater China lower – this
could be an important steer for the broader market in terms of the outbreak’s
impact. Most of Apple’s products are made in China, while the country
accounts for about 16% of global revenues. Chinese exposure has the
potential to dent the stock whatever the Q1 earnings turn out to be if the
guidance is soft.
We’ve had decent
indications from the Services side of the business indicating that its
pivot to being more of a Services business is in full swing. App store
customers spent a record $1.42bn between Christmas and New Year, 16% up on last
year, the company has said. Management also revealed that Apple News is drawing
over 100m monthly active users across the US, UK, Canada and
Australia. Services is accounting for an increasingly large chunk of
earnings, supportive of the recent multiple expansion. However we may see margins hit by content creation investment
with Apple TV+ – investors will be keen to hear how this service has performed
on launch. Services growth has pulled back a touch
in recent quarters and could further slow.
iPhone sales matter a lot less
The fiscal first quarter
is always Apple’s strongest as it chalks up the holiday season and new iPhone
models. But sales are less important than in the past. We’ll be
looking for any guidance from management on the year ahead and, crucially, the
potential super-cycle 5G refresh when it happens. Apple’s first 5G phones are due this year, although there is talk of
delays to get the fastest devices to market, so any guidance on this will be
The improvement on both
top and bottom line in the fiscal fourth quarter came despite a 9% drop in
iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it
shows how much of the lifting is now being done by other parts of the business.
It suggests Apple is reaching an inflection point where it’s no longer
dependent on the iPhone for EPS growth. This is across the board a
positive. Indeed for 2019 as a
whole, iPhone sales fell 14% but the
stock was up 89%.
Apple has been
increasingly talking up its Wearables business as this has been a particularly
strong performer. Wearables, Home and Accessories knocked it out the
park in Q4, with sales up 54% to $6.52bn. This was by far the fastest
growing segment and will account for an increasing percentage of sales,
Q4 confirmed that the US consumer remains
strong. Indeed, almost all the growth came from the Americas, which
is dominated by US sales. American consumers still look in good shape. Sales in
Europe, Japan and Greater China fell. We will
look to the holiday quarter to see whether international demand is improving
Holiday quarter could
be record breaking
Guidance for the fiscal
first quarter was bullish, and Apple could mark a record for quarterly
revenues. Apple is guiding revenue of between $85.5 billion and $89.5
billion. Early indicators suggest the iPhone11 is performing well with
consumers. Favourable comparisons in China from last year are assured, given
the previous year’s downswing in iPhone sales in the region.
The stock has run up quite
a head of steam to top $320 before pulling back a touch. We noted on Jan 8th a
potential topping pattern on the chart as it fails to make new highs and the
14-day RSI indicating overbought conditions, while noting that MACD could
also be turning. Indeed since
then we have seen the daily MACD turn lower below the signal line and the RSI
divergence played out with a pullback last week and into this week. On a weekly
chart, the RSI and MACD show the stock is hyper-extended and trading well
north of its long-term moving averages. Further pullbacks could occur if the
earnings are not least in line with expectations.