Apple Earnings Will Test Rally (NASDAQ:AAPL)

After the bell this Thursday, we’ll receive fiscal third quarter results from technology giant Apple (AAPL) for its June ending period. The stock has been one of this year’s winners, rallying to a new all-time high near $400 recently before pulling back. As we get closer to the launch of a new generation of iPhones, this week’s report will provide key clues as to whether or not the rally can continue in the near term.

Due to the coronavirus hurting consumer spending and shutting down many Apple stores for parts of the quarter, revenues and earnings per share are forecast to decline. As a reminder, management did not give overall guidance for the quarter, outside of a few small comments on the conference call. In the table below, I’ve detailed some key numbers from the fiscal Q3 period over the past two years, along with the two major estimates for this year’s period. I’ll fill in the actual numbers once we get them, and dollar values are in billions except for per share amounts.

(Source: Past results from Apple investor relations site, seen here, with current estimates from Seeking Alpha Apple estimates page, seen here)

It will be interesting to see how much iPhone revenues drop over the prior year period. Management was calling for the decline to worsen from fiscal Q2’s 7% year over year decline, even though the new cheaper iPhone SE has reportedly sold well. Is this phone, however, stealing sales from Apple’s premium devices? Normally we would see the new flagship set of smartphones announced about six weeks from now, but the overall timeline is uncertain given the pandemic. Most analysts seem to be expecting about a month delay for the consumer launch, although Apple might still show off the new phones in September.

Interestingly enough, street analysts have been getting more bullish lately. Since the end of April, the average revenue estimate for fiscal Q3 has risen by more than $1 billion. At the moment, that implies about a 10.05% decline sequentially from Q2, which is more than last year, but a bit below the longer term averages as detailed in the table below. Even if we just look at the last three years, the average decline was $6.52 billion or 11.43%, so a decline this year that averages the past three, five, or seven Q2 to Q3 periods would mean Apple misses on the top line.

(Source: Apple quarterly filings, seen here; numbers in yellow are based off current estimates linked above)

The timing of this year’s iPhone launch will be critical for fiscal Q4, which usually contains a week or so of new phone sales. Right now, analysts are calling for $61.79 billion in fourth quarter revenue, a year over year decline of 3.51%. I think that estimate is fair if you assume a normal iPhone launch schedule, given the coronavirus, even though the new phones are expected to spur a supercycle of upgrades. However, if new phone sales don’t start until sometime in October or November, then I believe the company’s top line will be pressured a little bit more, and estimates will likely need to come down. It will be interesting to see if we get any formal guidance from management this week, or like the report three months ago and so many others out there, Apple decides not to give guidance.

One of the items I’m really curious to see is the company’s capital return plan. Apple has finally gotten back under $100 billion in net cash in recent quarters, and the stock did surge to new highs in the past few months. Did management continue to buyback shares near its $20 billion per quarter pace, or have things slowed down recently? With overall free cash flow still being quite decent on a yearly basis, the net cash balance won’t be zero anytime soon, but the buyback likely cannot continue at this pace forever.

As for Apple shares, they closed Friday a little over $370, down almost $30 from their recent high. Last week’s finishing price just happens to be less than a dollar above the average price target on the street currently. If shares pullback from here, perhaps on a negative report, the 50-day moving average (in purple) will be in play in the low $350s, with the 200-day (in green) a little under $300. I don’t think shares will see that longer term line anytime soon unless we get a really bad report this week combined with a meaningful market pullback in the next couple of weeks.

(Source: Yahoo! Finance)

Apple will report third quarter earnings this week, and investors will hope that the news can help the rally to continue. How much of a decline we see from iPhone revenues will likely be the main factor that will determine a beat or miss, and expectations have ticked up a notch recently. Everyone will also be looking to see if management provides guidance, and what it could possibly mean for the timing of this year’s iPhone launch. Apple shares remain just a stone’s throw from their all-time high, but a bad report could also send the stock below a key technical level.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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