Apple (AAPL) Earnings Preview: It’s All About the iPhone

Apple (AAPL, $169.04) euphoria is at a fever pitch. Consumers are anxiously waiting for Friday, when Apple will make its first deliveries of the iPhone X – the sky-high-priced 10th anniversary edition of the company’s ubiquitous smartphone. Meanwhile, investors have driven AAPL shares 7% higher in just one week in the run-up to Thursday evening’s report for the company’s fiscal fourth quarter ended Sept. 30.

Given that Apple's stock sits at an all-time high – amid a breathtaking 46% year-to-date run that has roughly tripled the broader market’s performance – it’s essential that the company deliver a rosy report this week.

If Wall Street’s analyst community is any indication, that’s what investors will get.

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Apple Earnings Expectations

Apple’s fourth-quarter figures will be an early gauge of the success of the iPhone 8 and 8 Plus, which launched in late September. Meanwhile, forward guidance should give Wall Street some idea for how optimistic Apple is about its entire iPhone lineup. That includes the iPhone X, which at a $999 starting price is its most expensive smartphone ever, and sold out within minutes of its first pre-order availability.

These are the numbers that ultimately will make or break Apple’s momentum. While the company is trying to diversify and reduce its reliance on iPhone sales, the gadget still accounts for 55% of revenues; the next closest contributor is services (such as iTunes and the App Store) at 16%.

Those revenues should come to $50.8 billion for the quarter, according to analysts’ consensus estimates. That would represent 8.4% growth, and is expected to filter down to a 24.7% improvement on the bottom line to $1.87 per share. That figure is higher than the $1.81 estimate that stood 90 days ago. If you’re looking for a flashier sign of optimism from the analyst community, train your eyes down the road. In the past 30 days alone, eight analysts have revised their fiscal 2018 profit guidance higher.

Based on their comments, that’s largely because of optimism about Apple’s latest line of iPhones.

GBH Insights analyst Daniel Ives predicted record smartphone sales for Apple in a note that included a “Highly Attractive” rating (equivalent of buy) and a price target range of $190 to $200 that would imply a market capitalization of more than $1 trillion at the high end.

Despite hurdles such as supply chain issues and a delayed release for the iPhone X, Ives says “the iPhone X product cycle could be the strongest iPhone product cycle to date” and believes Apple will sell 265 million iPhones in the coming fiscal year. He also compared the current level of pent-up demand to the iPhone 6, which saw “unprecedented” success and helped drive 231 million iPhone sales in the 2015 fiscal year.

KeyBanc analyst Andy Hargreaves also shrugged off supply chain issues, telling CNBC that pent-up demand is “certainly better than the alternative.” And Nomura’s Jeffrey Kvaal wrote that he’s optimistic about the iPhone X because shipment times for pre-orders have swelled out to five to six weeks – much better than the iPhone 7 Plus and iPhone 6/6S launches.

However, holders of AAPL shares should be aware of a couple of signs of weakness.

Consumer Intelligence Research Partners estimates that the iPhone 8 and 8 Plus made up just 16% of all U.S. iPhone sales during the fiscal fourth quarter – a significantly smaller share than than past two releases. While that could be a result of pent-up demand for the upcoming iPhone X, that still could weigh on Q4’s numbers.

And bullish estimates from smartphone research firm Canalys signaling a rebound in Chinese iPhone shipments came with a caveat. Although shipments jumped 38% year-over-year to 11 million units, analyst Mo Jia believes the growth is temporary and called the iPhone X’s pricing structure and supply “inhibiting.”