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Why Apple’s Q1 Earnings Could Be A Good News/Bad News Story

The tech giant likely saw strong iPhone sales in the holiday quarter, but some worry that its projections for the next three months will underwhelm.

Why Apple’s Q1 Earnings Could Be A Good News/Bad News Story
[Photo: Nicholas Santoianni/Unsplash]

In a way, tomorrow is Judgment Day for Apple’s next-generation phone, the $1,000 iPhone X.

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When Apple reports its holiday-quarter earnings after the bell on Thursday, the company will tell us how quickly iPhones flew off the shelves during the holidays and, more importantly, how well it expects them to sell in the coming months.

Apple won’t break out the sales numbers for the iPhone X, but we’ll be able to get a good view of sales by the average sale price (ASP), which it does report. Heavy sales of the $1,000 phone would push the ASP upwards during the quarter.

Apple may report a record quarter. It’s likely to beat analyst consensus expectations of $3.83 earnings per share on revenues of $87 billion. Analysts expect iPhone sales of 80 million units. The results will likely be fueled mainly by solid sales of iPhone X, especially in China, during the holiday quarter.

Some investors want to see strong Holiday quarter sales, along with some assurance that sales will remain strong into the March quarter.  So investors and analysts will be listening closely for Apple’s iPhone sales forecast for the current, post-holiday, quarter.

Palpable Angst

Investors have been nervous about Apple in recent weeks because of mixed reports on how well the iPhone X sold during the holiday season and afterward. A recent report in Nikkei cited supply-chain sources saying that Apple halved production of the iPhone X for the March quarter, suggesting a post-holiday slump in iPhone sales.

There’s a bigger picture here. Apple is relying in large part on the iPhone X to fuel the growth of its smartphone business, which still provides at least 60% of total revenue. In fact, Apple’s current stock price may already rest on the assumption of strong iPhone X sales. A lackluster iPhone sales forecast Thursday might let some of the air out of the stock.

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In a still larger sense, acceptance of the iPhone X may say a lot about Apple’s ability in 2018 to market hit products. The phone represents a new “supercycle”—that is, it’s a new generation of iPhone that reimagines and reinvents what the device is supposed to be. Apple billed the iPhone X as a game-changing device, “the smartphone of the future.” This quarter’s numbers–and the sales forecasts for next quarter–might tell us a lot about whether consumers are buying in to that vision. The worst-case scenario for Apple is if the phone just isn’t amazing enough to mainstream consumers to justify the four-figure price tag.

Not everybody is pinning so much meaning to tomorrow’s iPhone forecast. “If this were material, it would have been pre-announced–It wasn’t,” wrote Moor Insights & Strategy principle analyst Patrick Moorhead in an email Wednesday.

“It doesn’t really matter which model Apple sold, X, 8 or even 7,” he says. “What matters is how much more they made versus a year ago and the ASP. I believe we will see an ASP increase, which is a big win for Apple.”

Scott Freeze, CIO at fund manager Sabretooth Advisors, believes holiday quarter iPhone sales numbers may be buoyed up by a first wave of Apple faithful and people who have to have the latest device. The numbers will also benefit from some “carry forward” of iPhone sales from the previous quarter, Freeze said.

But the second quarter of the device’s availability, which Apple will be forecasting tomorrow, may represent sales to more circumspect, mainstream consumers. These are really the people Apple has to convince. Freeze says that after all the evaluations and speculations about iPhone X sales, investors are ready for Apple to show in black-and-white terms that the units are moving.

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