Upcoming 5G iPhone release, not recent results, seen as key
Apple (AAPL) is scheduled to report results for the company's third quarter of fiscal year 2020 after the market close on Thursday, July 30, with a conference call scheduled for 5:00 pm ET. What to watch for:
1. 'HIGH BAR': Last quarter, Apple beat consensus earnings and revenue expectations as CEO Tim Cook touted that Apple showed growth despite the impact of COVID-19, "driven by an all-time record in Services and a quarterly record for Wearables."
Deutsche Bank analyst Jeriel Ong recently said he expects a "strong fundamental" fiscal Q3 report from Apple and kept a Buy rating on the shares with a $400 price target. However, the stock's 30% rally since May 1 "sets up a high bar," especially with Apple trading at 23 times 2021 earnings estimates, Ong said in his pre-earnings research note. A big question is whether Apple provides September quarter guidance, which would easily signal whether iPhones are delayed beyond their typical "last week of September release," according to the analyst. Ong believes the iPhone launch will be delayed, but believes that Apple is the best name to own in the IT Hardware landscape for the longer-term.
Noting that bullish sentiment is swirling around Apple's stock, Wedbush analyst Daniel Ives said he continues to believe investors are viewing headline June results with "a grain of salt." Ives argues that the Apple growth story moving higher all rests on the upcoming iPhone 12 "supercycle," which he believes is the most significant product cycle since iPhone 6 was released in 2014. Based on his analysis of iPhone sales globally, coupled with a robust services business, the analyst believes Apple should exceed the Street's total revenues and pro forma EPS forecasts of $52.1B and $2.04, respectively. He has an Outperform rating and a price target of $450 on the shares.
Morgan Stanley analyst Katy Huberty recently said she sees a favorable setup for Apple into earnings, predicting that its June quarter product revenues will likely top consensus estimates and that the company's services growth is likely to accelerate from the March quarter. The analyst, who added that recent survey data ahead of the company's upcoming launch of 5G iPhones shows an increasing likelihood of smartphone upgrades in the next six months, keeps an Overweight rating and $419 price target on Apple shares.
Taking the other side, Goldman Sachs analyst Rod Hall raised the firm's price target on Apple to $299 from $263 and kept a Sell rating on the shares ahead of the company's fiscal Q3 earnings report. The analyst believes Apple will not offer guidance for the September quarter due to ongoing uncertainty around COVID-19 and possibly on whether the iPhone launch will be delayed. Hall continues to assume that Apple will deliver the iPhone on time in late September. However, he continues to forecast 2021 earnings for Apple that are 16% below consensus on the belief that product unit sales and average selling prices falter and Services growth slows. Apple's recent stock performance is "unsustainable," says Hall, who continues to recommend that investors avoid the stock.
2. ANTITRUST WORRIES: On Wednesday afternoon, Apple's Tim Cook was among the big tech CEOs that were called to testify during a House of Representatives antitrust hearing along with Facebook's (FB) Mark Zuckerberg, Google's (GOOG, GOOGL) Sundar Pichai and Amazon's (AMZN) Jeff Bezos.
In a report a week ago, The Wall Street Journal's Sarah E. Needleman discussed the ways in which Apple is defending how its App Store works in the face of mounting antitrust scrutiny, including by touting economic research the company commissioned that indicates the fees it gathers from developers are in line with those charged by other digital platforms. The company's efforts to shield its business come as the Justice Department is moving forward with an antitrust inquiry over its App Store practices, Needleman noted, citing people familiar with the matter.
3. CHINA WORRIES: In mid-May, Wedbush's Ives noted media reports indicating China was ready to put U.S. companies such as Apple, Qualcomm (QCOM), and Cisco (CSCO), among others, on an "unreliable entity list." Ives has argued that no U.S. tech company is more impacted by the U.S./China trade battle than Apple. While China trade uncertainty will add to an already worrisome near-term situation around the global demand picture, the fundamental impact on iPhone production and the potential backlash in the region thus far is "more bark than bite," Ives contended at the time.
Since then, DigiTimes' Aaron Lee and Willis Ke have reported, citing supply chain sources, that Apple has stepped up moving more of its iPhone production to India and Vietnam as it looks to better diversify manufacturing risks amid the escalating trade tensions.
In early June, Bloomberg's Ragini Saxena and Santosh Kumar reported on how India is looking "to woo" global smartphone manufacturing companies to diversify from China.
4. LESSENING RELIANCE ON INTEL: On June 22, Apple held the company's annual Worldwide Developers Conference in an online-only format, during which the tech giant unveiled a new iPad OS, iOS, and Apple Watch OS, as well as macOS Big Sur with a Safari browser update. Most notably, however, Apple announced that Mac computers will be transitioning away from Intel (INTC) chips to instead use Apple's own silicon chips. CEO Tim Cook noted at that time that the transition from Intel's chips will take two years.
Following the WWDC, Credit Suisse analyst Matthew Cabral said the event was largely as expected, with unifying themes that include a steadfast commitment to privacy; the advantages in owning an integrated hardware/software stack in the push toward increased customization and AI/ML; and converging the use case across platforms. All-in, the launches were more incremental versus thesis-changing, according to Cabral, who has a Neutral rating on Apple shares.
Meanwhile, Goldman's Hall noted that Apple confirmed at WWDC that it plans to transition Macs to its custom silicon from Intel chips, adding that he thinks the company's "relatively rapid" schedule "looks aggressive." While he sees Apple maintaining its substantial product quality advantage, Hall is concerned that Apple's expensive products are likely to see substantially weaker demand than consensus expects.
Keywords: earnings, earnings watch, Q3, iPhone, 5G, apple watch