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Apple Earnings Preview: What About the iPhone?

Stocks in this article: AAPL T VZ

SAN FRANCISCO ( TheStreet) - Apple (AAPL) announced several new products this week, including the much-anticipated iPad Mini, but the attention now turns to fourth-quarter earnings, and more specifically, the iPhone, Apple's biggest revenue driver.

The fiscal third-quarter was a rare miss for Apple, as the company blamed Europe and speculation about new products for the earnings miss. In the fourth quarter, which ended Sept. 30, Apple launched the iPhone 5 to incredible pent-up demand, selling over 5 million units during its debut weekend. Even though CEO Tim Cook has described the iPhone 5 as the fastest-selling phone in history, supply chain constraints have prompted concerns on Wall Street that Apple may not make its numbers again this quarter.

Sterne Agee analyst Shaw Wu, however, believes these concerns are overblown. In a recent analyst note, Wu estimates that Apple sold around 27 million iPhones during the quarter, slightly ahead of Wall Street forecasts of between 25 million and 26 million phones. "We believe investors have gotten overly pessimistic with demand and near-term component issues," he wrote. "As we have said before, our supply chain checks have indicated still robust demand trends, despite Maps concerns and production capacity has improved due to better yields on in-cell touchscreens." He rates Apple shares "buy" with an $840 price target.

According to analysts polled by Thomson Reuters, Apple is expected to report $8.74 a share in earnings on $35.8 billion in revenue.

Recent results by AT&T (T) and Verizon (VZ) may also point to upside in iPhone sales, potentially satisfying investor concerns. AT&T announced it activated 4.7 million iPhones in the quarter, but did express some caution. In its press release, AT&T said its postpaid results were negatively impacted by iPhone 5 inventory levels, and the large majority of third-quarter iPhone sales went to existing customers. Verizon activated 3.1 million iPhones during its third quarter, 651,000 of which were iPhone 5s.

The iPhone generates most of Apple's quarterly revenues, so any worries about supply constraints are going to weigh on investors' minds.

Baird Equity Research analyst William Power notes that supply constraints may have eased a bit recently, but there are still concerns for the all-important first quarter. "We expect solid FQ4 results when Apple reports October 25, with the bigger focus likely on comments regarding iPhone 5 supply in FQ1," Power noted. "Importantly, our checks suggest strong overall demand, though supply limitations could limit FQ1 upside. However, our checks indicate that supply has improved moderately over the past week, which could be an encouraging sign." He rates Apple "outperform" with a $750 price target.

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