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AAPL Stock: Apple Will Drop The Mic This Earnings Season

Apple will report fiscal Q4 earnings on October 28. The Apple Maven thinks that the Cupertino company will impress this time again, and that AAPL stock investors stand to benefit.

Third calendar quarter earnings season is just around the corner. Apple will release its results on Thursday, October 28, after the closing bell. As usual, the Apple Maven will cover the event via live blog, always with an eye on how Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report will perform during and after earnings.

Today, I present a few reasons why the Cupertino company and its shares may surprise analysts this earnings season, and how this could be good news for investors.

Figure 1: Apple Park in Cupertino, CA.

Figure 1: Apple Park in Cupertino, CA.

(Read more from the Apple Maven: Apple Stock: 3 Reasons Why The Selloff Is An Opportunity)

Expect iPhone to come in strong

For several months in and prior to 2020, bull and bears on Wall Street disagreed on how successful Apple’s 5G “super cycle” would be. Some, like Wedbush’s Dan Ives, believed that the iPhone 12 would kickstart a strong upgrade wave that would last years. A few others were much less optimistic.

As I discussed recently, the financial performance of last year’s iPhone has surpassed expectations. Case in point, Apple’s smartphone revenues in the post-holiday quarter grew year-over-year by an astounding 66% – in part due to pent-up demand, since Apple experienced production delays in the previous period. The growth figure underscored the strength of the 5G super cycle as early as 2020.

The better news is that this year’s iPhone 13 has shown signs of having met even higher demand. Analyst Dan Ives estimates that orders for the new iPhone 13 have been about 20% higher than those of its 2020 predecessor. Meanwhile, Credit Suisse’s Mathew Cabral sees wait times for the Apple iPhone 13 family that continue to track longer than comparable models last year.

Because the iPhone 13 was released so recently, I believe that many analysts on Wall Street will be too slow to reset their expectations in time for earnings season. Add de-risked expectations to very easy pandemic-impacted comps in fiscal Q4 of last year, and Apple is likely to impress on iPhone revenues.

(Read more from the Apple Maven: Apple Stock: iPhone Super Cycle Is Alive And Well)

Services may be resilient

The second piece of the puzzle that I think will be important is services. This key business segment was responsible for nearly 20% of Apple’s total revenues in fiscal 2020, and an even more impressive one-third of total operating profits in the same period.

Apple’s services segment enters fiscal fourth quarter earnings season scarred by the bearish narrative around the App Store, which I estimate to account for one-third of Apple’s service sales. As a reminder, Apple has succumbed to pressures from global regulators and adjusted its compensation policies to favor certain app developers, at the cost a piece of Apple’s commissions.

I find it plausible that analysts and investors will be more cautious about Apple’s services business ahead of earnings season. However, there seems to be enough evidence suggesting that Apple’s financial statements will be barely impacted by the App Store drama.

Morgan Stanley’s Katy Huberty, for example, says that any negative impact from the App Store’s recent events will equate to 2% of revenues and 5% of EPS, at worst. Jefferies’ Kyle McNealy thinks that EPS could take a 4% hit, and the analyst doubts that any impact would be felt before the June 2022 quarter.

Due in part to de-risked expectations, I believe that Apple’s service segment has a good chance of over-delivering in fiscal fourth quarter 2021.

Bar is finally set low for the stock

Lastly, Apple stock is notorious for appreciating ahead of big announcements (e.g., earnings day, product launches, etc.) and selling off after these events. However, this time, Apple stock is trading around 9% below the all-time peak of only about one month ago, despite lack of obvious deterioration in business fundamentals.

To be clear, share price is not something that Apple can control directly. Also, revenues and EPS growth expectations, at 31% and 68% respectively, may seem high for the Cupertino company to overcome (here, keep in mind that comps will be very easy in 2021).

Still, I believe that AAPL shares can finally benefit in post-earnings trading from coming into the earnings season in a position of relative weakness this time. Should this prove to be accurate, Apple investors could be in for a pleasant surprise in the next few weeks.

Twitter speaks

Compared to expectations of 31% and 68% year-over-year growth in revenues and EPS, respectively, how do you think Apple will perform in fiscal fourth quarter?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)