Apple (AAPL) is scheduled to report fourth fiscal quarter results after the market close on Thursday, November 2, with a conference call scheduled for 5:00 pm ET. What to watch for:
DOWNGRADES SINCE LAST QUARTER: Last quarter, Apple beat consensus sales and earnings expectations, reporting EPS of $1.26 on Q3 revenue of $81.8B, which compared to consensus forecasts of $1.21 and $81.55B, respectively.At that time, Apple CEO Tim Cook highlighted record Services revenue and over 1B paid subscriptions, stating in the Q3 earnings release: “We are happy to report that we had an all-time revenue record in Services during the June quarter, driven by over 1 billion paid subscriptions, and we saw continued strength in emerging markets thanks to robust sales of iPhone. Apple CFO Luca Maestri added: “Our June quarter year-over-year business performance improved from the March quarter, and our installed base of active devices reached an all-time high in every geographic segment. During the quarter, we generated very strong operating cash flow of $26B, returned over $24B to our shareholders, and continued to invest in our long-term growth plans.”Subsequent to that report, Rosenblatt analyst Barton Crockett downgraded Apple to Neutral from Buy with a price target of $198. The “mixed” fiscal Q3 report “highlights the slowdown phase in which Apple now sits,” the analyst told investors. The firm said a growth slowdown in the U.S. seems likely to last until a material new product category takes hold. A reacceleration is “uncertain both in timing and success,” leaving little reason to own the shares, which are now trading near peak absolute and relative multiples, contended Rosenblatt.More recently, on October 4, KeyBanc analyst Brandon Nispel downgraded Apple to Sector Weight from Overweight without a price target. The analyst cited valuation for the downgrade, saying Apple was trading near all-time-high multiples and a large premium to the Nasdaq versus history. Meanwhile, the company’s U.S. sales are likely to struggle and initial U.S. iPhone promotions from U.S. carriers are “being restrictive,” the analyst told investors. The firm thinks Apple’s international growth expectations for reacceleration “may be aggressive” and consensus estimates “appear full.” Apple’s user growth is still more important than unit growth, but this “could be a losing argument” near-term given a lack of catalysts, which results in a neutral risk/reward, wrote KeyBanc.Current consensus EPS and revenue forecasts for Apple’s September-end quarter stand at $1.39 and $89.35B, respectively, according to data from Bloomberg. Consensus EPS and revenue forecasts for Apple’s December-end quarter stand at $2.08 and $122.77B, respectively, according to Bloomberg.
CHINA CONCERNS: On September 6, The Wall Street Journal’s Yoku Kubota reported that China had banned the use of Apple’s iPhones and other foreign-branded devices at work in what the Journal called “the latest step in Beijing’s campaign to cut reliance on foreign technology.” Currently, Apple dominates the high-end smartphone market in the country and counts China as one of its biggest markets, relying on it for about 19% of its overall revenue, the Journal noted at that time.In a note published the next day, BofA analyst Wamsi Mohan commented that the timing of China’s banning of government staff from using iPhones and other foreign branded devices for official work purposes was “interesting” given that it coincided with the recent launch and availability of a domestic high-end, 5G-capable smartphone made by Huawei as “a real alternative to an iPhone.” If the report is accurate, this would be the first broad-based instance of banning usage of Apple devices, but it remains unclear how widespread this potential order would be, the analyst said at that time. Given that China accounts for roughly 40-50M iPhone units for Apple, BofA estimates up to a 5M to 10M unit headwind if such a ban were to go though and subsequently be enforced.More recently, on October 24, BofA noted a series of articles that highlight Apple’s exposure to China over the past few months, but added that CEO Tim Cook “has navigated these challenges in an extraordinarily nimble fashion.” The firm, which sees higher risk to the valuation multiple versus earnings estimates at this point in time from China risks, expressed the opinion that recent China headlines have already compressed the earnings multiple by two to three times. BofA maintains a Neutral rating and $173 price target on Apple shares as it argues that positives of new products are offset by the risk of weaker consumer spending.
SCARY FAST: On October 30, Apple announced M3, M3 Pro, and M3 Max, three chips it said feature “groundbreaking technologies that deliver dramatically increased performance and unleash new capabilities for Mac.” Apple also unveiled its new MacBook Pro featuring the M3 family of chips and unveiled a 24-inch iMac with a new M3 chip during its “Scary Fast” presentation.Following the unveiling event, Bernstein noted that the Macs themselves are unchanged in form factor and battery life from their predecessors, other than Apple introducing a new space black color. The firm sees no surprises, perhaps some disappointment, and some price changes – potentially accretive. Further, Bernstein believes the revenue impact for Apple is likely to be small and that the key near-term focus for investors remains the success of the iPhone 15. The firm has a Market Perform rating on Apple shares with a price target of $195.In its own October 31 note, Jefferies lowered the firm’s price target on Apple to $195 from $220 and kept a Buy rating on the shares following the “quick event” focused on the Mac line of products getting new M3 chips and ahead of earnings. The firm is lowering its estimates, “more so in the medium term,” on fears of lengthening replacement cycle, as well as competitive threats in China, and says it hopes to get some answers regarding China share, replacement cycles, and “whether or not we’ve entered a new normal” on the upcoming earnings call. The firm lowered its 2024 EPS forecast to $6.42 from $6.50 and cut its revenue view to $392.8B from $401.4B, noting it has moved “further below Street in FY24 as it sits at $405.2B.” The firm has “always flagged Apple’s valuation as being full, but given expectations for a relatively quiet quarter, do not see it as a catalyst for repricing,” the analyst added.
OVERHEATING: On September 28, The Wall Street Journal’s Aaron Tilley, Joanna Stern, and Yang Jie reported that some iPhone 15 users have been complaining about high temperatures that make the devices difficult to touch at certain times. Ming-Chi Kuo, an influential Apple analyst at TF International Securities, attributed the heat issues to the iPhone 15 Pro’s new lightweight design, which might not dissipate heat as well as past models.On September 30, Apple said in a statement to media outlets: “We have identified a few conditions which can cause iPhone to run warmer than expected. The device may feel warmer during the first few days after setting up or restoring the device because of increased background activity. We have also found a bug in iOS 17 that is impacting some users and will be addressed in a software update. Another issue involves some recent updates to third-party apps that are causing them to overload the system. We’re working with these app developers on fixes that are in the process of rolling out.”
PRODUCT HEADLINES: During the quarter, other reporting on Apple’s products and services have included:
More By This Author:Earnings Recap: Shell, Palantir, Starbucks, Shopify Rise; Moderna Falls
Solar Stocks Bleed Amid Slowing Demand And High Interest Rates
3 Potential Stocks Set Up For A Historically Performant November
