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Jan. 28, 2020, 7:34 a.m. EST

Apple earnings: A year after holiday misfire, Apple is worth twice as much

After China-fueled disappointment last year, Apple heads into earnings report with $1.4 trillion valuation and strong investor optimism

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By Emily Bary


Reuters
Demand for Apple’s 11 is “robust” in Asia, a Wedbush analyst said.

What a difference a year makes.

After flubbing the holiday period a year ago, Apple Inc. /zigman2/quotes/202934861/composite AAPL -1.03%  is sitting pretty as it prepares to update investors on what could be a record quarter of sales. The company’s stock has more than doubled over the past 12 months amid optimism about new services like streaming video and the potential for a wave of iPhone upgrades later this year, when 5G phones are expected to hit the market.

/zigman2/quotes/202934861/composite AAPL 320.30, -3.32, -1.03%

Now it’s time for Apple to start proving worthy of its lofty valuation, which tops $1.4 trillion. The company’s fiscal first-quarter report Tuesday will be the first to include the Apple TV+ streaming service, which arrived to mixed reviews in November before largely fading from the conversation amid bigger streaming moves from new rivals like Walt Disney Co. /zigman2/quotes/203410047/composite DIS -0.66%  and Comcast Corp.’s /zigman2/quotes/209472081/composite CMCSA +0.11%  NBCUniversal.

Don’t miss: Netflix earnings don’t solve riddle of what Disney competition means

It may be tough to tell exactly how well Apple TV+ is performing given Apple’s limited disclosures around its various business areas as well as its free trials for those who buy a new device. Investors will nonetheless be looking for any indications from management that consumers are paying up for the service and sticking around.

Much as investors will want to know how Apple’s new iPhone 11 line and popular AirPods headphones did during the holiday season, the stock’s big rally is predicated on the future. Chief Executive Tim Cook is never one to spill big future plans, but investors will be looking for any new nuggets of information Tuesday afternoon to gauge whether the stock’s recent run up is justified. The company is reportedly planning to launch a lower-cost iPhone in the spring before launching 5G devices later in the year, and some say Apple may consider a more permanent shift to the way it launches new phones by staggering introductions instead of releasing all models in the fall.

Analysts surveyed by FactSet are calling for $88.45 billion in December-quarter revenue, which would be Apple’s highest quarterly total on record, surpassing its $88.29 billion haul from December 2017. The company was expected to crack the $90 billion mark a year ago before its disclosures about emerging-market weakness sent the stock cratering.

What to expect

Earnings: Apple is expected to report record earnings of $4.54 a share, according to FactSet, up from $4.18 in the year-ago quarter. According to Estimize, which crowdsources projections from hedge funds, academics and others, the average estimate calls for $4.60 in earnings per share.

Revenue: The FactSet consensus models $88.48 billion in revenue, while the Estimize consensus calls for $88.47 billion. Apple generated $84.31 billion in the year-earlier period.

The iPhone is expected to drive $51.38 billion in revenue, according to FactSet, which would represent the bulk of Apple’s total but growth of only 1% from a year ago. Analysts surveyed by FactSet project similarly small year-over-year changes for the iPad and Mac categories, expected to generate $6.73 billion and $7.18 billion in revenue, respectively.

The wearables and services categories should remain Apple’s growth engines. The FactSet consensus models 35% growth to $9.85 billion in revenue for the wearables and accessories category, which includes AirPods, Apple Watches, and the HomePod smart speaker. Analysts tracked by FactSet see services revenue climbing about 20% to $13.06 billion.

Stock movement: Apple shares have climbed 98% over the past 12 months, as the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.44%  , which counts Apple as a component, has gained 16%. Of the 43 analysts tracked by FactSet who cover Apple’s stock, 25 rate it a buy, 12 rate it a hold, and six call it a sell. The average price target is $295.85, according to FactSet, 4% lower than recent levels.

What the analysts are saying

Apple’s wearables and accessories category was a star three months back, and analysts believe that holiday demand for smartwatches and AirPods was strong. D.A. Davidson analyst Tom Forte wrote that by Black Friday, Apple’s AirPods Pro were already unavailable until after the holidays, and will be interested in any Apple commentary on whether existing AirPods owners traded up to the more expensive, noise-cancelling model that was introduced at the end of the year.

Forte rates Apple’s stock a buy with a $375 target price.

Don’t miss: Apple may not get the big 5G bump investors expect, analyst says in downgrade

Wedbush analyst Daniel Ives echoed the optimism around AirPods, writing that they’re showing “jaw-dropping” momentum, which could drive a positive earnings surprise Tuesday along with “robust” iPhone 11 demand in Asia. He has an outperform rating and $400 target on Apple’s shares.

Bernstein analyst Toni Sacconaghi said that he’s torn on Apple’s stock given its big run-up but also its tendency to outperform when revenue estimates head higher. And while he’s not expecting a ton of upside for the December quarter, he said forecasts for the rest of the year seem too low, “principally for AirPods, where we estimate that we are above the Street by about $4 billion to $8 billion, providing a 150-300 bps cushion to total revenues per quarter.”

On Tuesday’s call, he’ll be watching for anything that iPhone challenges.

“Our relatively sanguine FY20 iPhone forecast is contingent on Apple achieving nearly double-digit unit growth in the face of a potential ~8% ASP headwind, which is not necessarily a slam dunk,” wrote Sacconaghi, who has a market-perform rating and $300 target on the shares.

Read: The long-promised ‘Year of 5G’ arrives with more promises and little 5G

Bank of America’s Wamsi Mohan asks “who doesn’t” expect a strong December quarter from Apple, and while he thinks the stock could move higher following the report, he said opportunities for upside might be “more hazy” after that. Trends to watch for include commodity-price inflation around DRAM and NAND storage, which could pressure margins, and the accounting impacts of the Apple TV+ free trials. He rates the stock a buy with a $340 target.

/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 320.30
-3.32 -1.03%
Volume: 25.14M
Feb. 20, 2020 4:00p
P/E Ratio
25.30
Dividend Yield
0.96%
Market Cap
$1401.47 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/203410047/composite
US : U.S.: NYSE
$ 140.37
-0.93 -0.66%
Volume: 5.98M
Feb. 20, 2020 6:30p
P/E Ratio
22.43
Dividend Yield
1.25%
Market Cap
$253.43 billion
Rev. per Employee
$295,532
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/zigman2/quotes/209472081/composite
US : U.S.: Nasdaq
$ 46.02
+0.05 +0.11%
Volume: 12.04M
Feb. 20, 2020 4:15p
P/E Ratio
16.25
Dividend Yield
2.00%
Market Cap
$209.53 billion
Rev. per Employee
$513,625
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
29,219.98
-128.05 -0.44%
Volume: 289.07M
Feb. 20, 2020 5:10p
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Emily Bary is a MarketWatch reporter based in New York.

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