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Slowing Smartphone Sales Could Undermine Apples Earnings

Apple is the largest U.S. company by market cap, providing consumers around the globe with dozens of products including their benchmark iPhone.  The company is also very active in services which include Apple Music as well as Mac computers and iPads. The largest segment for Apple is iPhone sales, and recent comments by suppliers have seen analysts warn that Apple will lower guidance and forecast lower than expected future earnings.  Investor concerns have driven the share price down more than 10% from its highs in March ahead of its earnings release on May 1, 2018.

iPhone X Expectations Where Too High

Apple had a record performance in the second-half of 2017, but all the buzz surrounding the iPhone X and iPhone 8, have been clouded by calls from their supply chain that there is declining interest in chips.  It appears that there were unrealistic expectations for the demand of the iPhone X. During their recent earnings call, Taiwan Semiconductor said that smartphone sales weakness would negatively affect their sales during the Q2 of 2018.

The Stock Price Has Underperformed Other Large Cap Technology Shares

Apple shares have underperformed other large-cap technology shares during the second half of 2017 and the first 4-months of 2018.  The performance of Apple’s share price relative to the XLK technology ETF (which Apple is part of and the largest component) is down 11% since hitting a high on August of 2017, and down 6% so far in 2018. Apple shares are widely owned, and a further selloff in the share price will have a significant effect on the broader markets.

 

The Numbers

Apple is expected to earn $2.69 per share. The range of estimates places the high at $2.80 per share and the low is $2.51. Earnings per share a year ago were $2.10 which would put net profits up 28%. Revenues are expected to come in near $60.98 billion which is an increase of 15% in the fiscal Q2. This compares to 52.9 billion a year ago. The range of sales forecast sees the high at $62.37 billion and the low at $58.27 billion. For the quarter ending June 2018, expectations are for Apple to earn $2.16 per share on $52.04 billion in revenue up 15% year over year. Growth estimates are 28.1% for this quarter and 29.3% for next quarter.

The trend in analyst’s forecasts is downward sloping.  EPS estimates have declined 7.5% over the past 90-days, and nearly 1% over the past 60 and 30-days. Apple is expected to update investors on its capital return plan when it releases its earnings.  Expectations are for the company to increase its share buyback plan significantly as well as increase its dividend allocations.

While earnings are likely to be strong, all eyes will be on guidance.  Expectations are already very low which gives the company an advantage. If Apple can dispute future declines in smart-phone sales and show that other segments are experiencing robust growth, the shares could rally from current levels.

 

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