Apple Earnings: Consumer Health May Be On Display As Company Opens Its Books

If any one company has a major influence on investors’ view of the market, Apple Inc AAPL might be able to stake that claim. Its influence on stock indices, mutual funds and ETFs, as well as on investor holdings, mean that it has both a price and psychological influence on the market.

When AAPL cut its quarterly revenue expectations earlier this month, it raised concerns not just about the health of the iPhone maker, but about consumer demand throughout the economy.

One primary theme investors have heard over the last six months is that the global economy might be slowing, but the consumer appears to be healthy. Considering Apple’s consumer-driven product lineup, if the company experiences a slowdown, what does that truly mean for the consumer overall?

Tuesday afternoon might bring some answers as AAPL get set to release its fiscal Q1 earnings after the closing bell in what could be one of the more difficult earnings reports for the tech giant. However, some of the bad news might already be penciled in after AAPL’s recent warning that it would miss its own revenue expectations by as much as 7%.

AAPL earnings are part of a horde of major tech and internet companies reporting this week. Some of the others include Microsoft Corporation MSFT, Amazon.com, Inc., AMZN, and Facebook FB. Arguably none of these, however, have the outsize influence of AAPL, which surprised investors at its last earnings by announcing it would stop breaking out unit sales of the iPhone (see more below).

China Troubles

AAPL shares took a plunge early this month after it announced in a letter from CEO Tim Cook that it was likely to see lower-than-expected revenue of $84 billion because of sliding iPhone sales in China, which AAPL blamed on ongoing tariff tensions between the U.S. and China. The company had previously guided for fiscal Q1 revenue of $89 billion to $93 billion. As some analysts noted at the time, it’s very rare for AAPL to have to dial back its own expectations.

Some Wall Street analysts have also said that AAPL’s sales struggles in China may be due in part to increased competition there as well as the increasing price of iPhones. Recent economic data from China also points to slowing economic growth there, which could have implications for sales of AAPL products.

But AAPL stock has since rebounded this month, up 10% after recovering from a low of about $142 per share Jan. 3. It now trades near $156 per share.

AAPL is now down about 8% over the past 52 weeks and is down about 30% in the past three months, roughly since its last quarterly report. Shares had peaked last fall at all-time highs above $230. See figure 1 below.

Apple’s Revenue and Guidance on Watch

The consensus earnings estimate for AAPL is $4.17 per share, according to third-party estimates. Revenue is projected to fall slightly to $84 billion, down 4.8% from $88.3 billion in the same quarter last year.

Last time out, AAPL reported Q4 earnings of $2.91 per share on revenue of $62.9 billion, both of which beat Street estimates. But shares plunged 7% to below its landmark $1 trillion-plus market cap after it reported iPhone sales of 46.9 million were essentially flat from the year prior. Compensating for the drag on sales, AAPL had increased the price of the iPhones so it reported an average selling price of $793 in Q4 2018, up 28% from the previous Q4.

For this quarter, investors will likely be watching for any changes or additions to AAPL’s guidance, which could be more cautious, perhaps either because of possible ongoing struggles with iPhone sales or to prevent another disappointment. Guidance could also reflect AAPL’s expectations for how the U.S.-China tariff tensions could play out, or how the trade policies could affect its bottom line.

One thing investors won’t be watching for is specific iPhone sales numbers, as AAPL said last quarter it will no longer release those figures. Essentially, the company said it didn’t want investors focusing on unit sales as a measure of the strength of its business. However, this quarter’s numbers will now include specific gross margin and revenue from its services service business that includes fees from Apple Music and its App Store, so investors may get a sense of how those lines are faring.

There’s been more internal focus on the services business growth in recent quarters, but also concern that iPhone demand could be fading as customers keep their phones longer or balk at higher prices for new models.

Figure 1: CLAWING BACK, BUT WELL OFF THE HIGHS. AAPL shares gained back most of the 10% they lost in early January, when the company lowered its revenue outlook. However, shares sit well off the all-time high of 233 from a couple months prior. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Apple Options Activity

The options market has priced in an expected share price move of 4.9% ($7.70) in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 157.5 and 160 strikes while put activity has concentrated at the 150 and 155 strikes. The implied volatility sits at the 59th percentile as of Tuesday morning.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.