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Apple (AAPL) Q3 2019 Earnings Preview: iPhone & China Sales

Benjamin Rains

Apple AAPL stock still rests 13% below its 52-week high despite its roughly 30% climb in 2019 amid trade war worries and a slowdown in iPhone sales. Now, with some of the big banks set to unofficially kick off Q2 2019 earnings season on Monday, July 15, let’s peek ahead to see what investors should expect from Apple’s third-quarter fiscal 2019 financial results.

Q2 Overview & Outlook

As of Wednesday, 22 S&P 500 members had already reported what we at Zacks qualify as their ‘second-quarter’ earnings results. Total earnings for these firms were down -15.2% from the same period last year on +2.9% higher revenues. Looking ahead, total Q2 earnings for the index are expected to be down -3.3% from the prior-year period on +4.0% higher revenues. This would follow the -0.2% earnings decline on +4.5% higher revenues in Q1.

It is worth noting, especially since we are looking at Apple, that the tech sector is the biggest earnings contributor in the S&P 500, bringing in 22.6% of the index’s total earnings in the forward four-quarter period. And the tech sector’s total earnings are expected to be tumbled -34.7%, which is worse than Q1’s -20.3% decline.

A downturn in chip stocks like Micron MU, Nvidia NVDA, and others are expected to play a significant role in this projected decline. But Apple, with its $941.72 billion in market cap, is also expected to drag the sector and the S&P down (also read: Previewing the Q2 Earnings Season).

 

 

 

What’s Going on with Apple?

As we can see, AAPL stock has fought its way back in 2019, despite its early May selloff. Apple fell, along with much of the market, on the back of renewed U.S.-China trade war fears. Nerves have calmed since then, and major U.S. indexes surged to new highs to start the second half the year after Presidents Trump and Xi Jinping decided to renew trade negations and not roll out new tariffs in what amounts to a trade cease-fire. Trump also said he would allow U.S. firms to once again work with Huawei.

Meanwhile, Apple spent the first half of the year trying to convince consumers that it takes user privacy very seriously. The move comes as worries mount that U.S. government regulators will take action against the likes of Facebook FB and Google GOOGL.

On top of that, Apple has jumped deeper into its services future. This includes its newer $9.99 a month magazine-heavy news service, a new Apple credit card in partnership with Goldman Sachs GS, and a subscription-based gaming offering called Apple Arcade. Yet, aside from its Spotify SPOT competitor Apple Music and its app store, the company’s soon-to-be-launched streaming TV service, called Apple TV+ could be a key growth driver down the road.

Outlook & Comparisons

Apple’s privacy and services push comes as the company’s iPhone sales slow. On top of that, the firm’s growth in China has sputtered, compared to its recent strength. Apple posted better-than-projected top and bottom-line results in Q2, but they both marked a decline from Q2 2018. AAPL’s adjusted earnings dipped 10%, with revenue down 5.1% to $58.02 billion—worse than Q1 2019’s 4.5% decline.

More specifically, second-quarter revenue in Greater China—which includes Hong Kong and Taiwan—tumbled 21.5% from the year-ago quarter to $10.22 billion. Overall, Greater China accounted for roughly 18% of Apple’s total second quarter revenue. Plus, Q2 iPhone sales dropped over 17% and accounted for over 53% of sales. Q1’s iPhone sales dipped 14.9%.

 

 

 

 

Looking ahead to the end of July, our current Zacks Conesus Estimates call for the firm’s adjusted Q3 EPS figure to sink 9.4% to $2.12 per share—but Apple almost always tops bottom-line estimates. Meanwhile, Apple’s revenues are expected to come in roughly flat from the prior-year quarter at $53.3 billion.

Apple’s iPhone revenue, which is still by far its largest source of revenue, is projected to dip roughly 13% from $29.91 billion in the year-ago period to $25.96 billion, based on our NFM estimates. This would mark the smallest downturn so far in fiscal 2019 for Apple’s flagship product, which is a good sign for investors. Meanwhile, the company’s sales in China are actually expected to climb marginally from $9.55 billion in Q3 2018 to $9.59 billion.

Bottom Line

Clearly, it appears that Apple’s Q3 numbers, which could change as we get closer to its report, are projected to come in much better compared to the first two quarters of its fiscal 2019. We can also see that Apple has experienced small year over year revenue downturns before, and AAPL stock has been able to climb nonetheless.

Apple stock closed regular trading hours Thursday down 0.73% at $201.75 per share, 13% off its 52-week intraday highs of $233.47. Apple is scheduled to release its Q3 fiscal 2019 earnings results on Tuesday, July 30.

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