Apple Inc reports first quarter earnings. Apple stock is down ahead of earnings.
Cupertino based tech giant Apple Inc (NASDAQ:AAPL) is scheduled to report its Q1 FY 18 earnings today, after the market close. The news ahead of the earnings has not exactly been great. Nikkei reported that due to lackluster demand, Apple will be cutting Q1 2018 iPhone X production from the initial 40 million planned to 20 million. The buzz around iPhone X has been a major catalyst for Apple stock over the past year.
Several analysts expected another “iPhone Supercycle” driven by strong demand for iPhone X. This expectation had driven Apple stock up by over 50%. So, a bad news on this front was not surprisingly a bad news for the stock. Apple stock has lost momentum in the last few days. Apple stock has lost around 7% in the last fortnight and is down for the year. In contrast, Nasdaq Composite (INDEX:COMPX) is up 7.3%. Investors must keep an eye on any announcement regarding iPhone X production or demand trends during the earnings call.
Now coming to the expectations from Apple’s Q1 earnings. The Wall Street consensus is for the Cupertino behemoth to report non-GAAP earnings of $3.83 per share on revenue of $87.06 billion. This implies a strong revenue growth of 11.1% on a year-on-year basis and EPS increment of 47 cents from the year-ago EPS of $3.36, up nearly 14%. Analysts estimate is slightly higher than the company’s guidance. During the previous earnings call, Apple CFO and VP, Luca Maestri had given a revenue guidance of $84 billion and $87 billion, with the midpoint of the range at $85.5 billion. A beat on the earnings front will be good news for Apple stock. As per the whisper number, Apple will report a non-GAAP EPS of $3.94, 11 cents higher than Wall Street consensus. However, investors will be more concerned about the guidance.
Apart from the iPhone X, investors must also keep an eye on other hardware sales figures like iPad and Apple Watch. iPad segment had reversed its declining sales and had posted double-digit growth figures in the past couple of quarters. And, then there is the services segment which includes revenue from AppleMusic, AppleCare, Apple Pay, licensing and other services. It is already the size of a Fortune 100 company but is still growing at a rapid pace. Over the last five years, the services segment has grown at a CAGR of over 23%. At this rate, the company could easily meet its target of generating $48 billion in revenues from the services segment. In fiscal 2017, the company had generated $30 billion in revenue from this segment. It not just the growth of the service segment, but also the strong margins which will be key to driving Apple stock higher from here. According to an estimate by Piper Jaffray, the services segment has a gross margin of around 60%. Investors will also be keeping an eye on Apple’s plans for its over $250 billion cash hoard, given the recent tax reforms.
Will earnings continue to propel Amazon.com Inc stock higher?
Another big tech company which is scheduled to report earnings today is Amazon (NASDAQ:AMZN). Unlike Apple, Amazon stock has rallied heavily this year. Amazon stock is up over 24% in the year-to-day period. This is after over 55% return the company had generated in 2017. Given the strong performance of Amazon stock, the eCommerce giant needs to deliver on earnings.
Analysts expect Amazon to report an EPS of $1.85, 22% higher than what the company had reported in the same quarter last year. The EPS expectation assumes operating margin expansion which is a bit aggressive given that Amazon saw operating margin decline last year. However, it not the EPS which many investors will be worried about. Amazon is a growth company and is valued for its rapid revenue growth despite its size. Going by the analysts’ estimate, Amazon is not likely to disappoint on this front. Wall Street estimate calls for Amazon to report revenues of $59.83 billion, a YoY growth of 36.8%.
By all indications, Amazon has had a strong quarter, especially on the top line front. According to a report by GBH Insight, Amazon cornered half of the eCommerce sales during the holiday season. Add to that, the fact that Amazon’s smart speaker echo dot was the top-selling Amazon device, as well as the top-selling product available from any manufacturer across all categories on the e-commerce platform, selling millions of units. Echo and other Alexa enabled devices are expected to be strong long-term growth drivers.
One factor which could hit Amazon’s bottom line is the India business. Amazon has been investing heavily in India. It has committed over $5 billion in investments towards its India business. While this business promises good returns in the long term, it does chip away a significant portion from the bottom line. The company is facing a strong competition from the homegrown eCommerce company Flipkart which recently raised $1.4 billion from Tencent, eBay and Microsoft. And, if recent rumors are to be believed, Walmart (NYSE:WMT) is expected to acquire a significant minority stake in Flipkart, making life tougher for Amazon. All in all India business could be a drag on the companies bottom line once again.
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