Tim Cook arrives at Sun Valley’s Allen & Company meeting in Sun Valley, Idaho.
David A. Grogan | CNBC
Apple is anticipated to report its third consecutive quarterly decline in revenue when it announces its earnings after the market closes on Thursday. Wall Street analysts are expecting sales of $81.7 billion, which represents a decline of about 2.3% compared to the previous year.
Despite concerns about slowing demand for consumer goods, including PCs and smartphones, Apple stock has surged over 51% in 2023 and has reached all-time highs. Investors view it as a safe haven with strong cash flow.
Analysts will be interested to know how the current quarter, ending in September, is performing. Although Apple has not provided guidance since 2020 due to uncertainty, it does offer some data points that investors can use to gauge overall sales growth or contraction.
More important than the current quarter will be Apple’s forecast, as it may provide clues about whether global economies are heading towards a “soft landing” after two years of interest rate hikes.
June is typically Apple’s slowest quarter, while the fourth fiscal quarter often captures back-to-school laptop spending, new iPhone model sales – typically launched in September – and sets the stage for Apple’s momentum heading into the holiday season.
“What will matter most will be management’s September quarter,” wrote Morgan Stanley analyst Erik Woodring in July, expressing his expectation for Apple to guide to year-over-year revenue growth again.
Emerging markets and China
Some analysts are eager to see Apple provide data on sales in India. CEO Tim Cook visited the country in April and expressed hopes for significant growth there. Analyst estimates suggest that India has become one of Apple’s top five iPhone markets during the quarter.
“On the call, we look for additional details on its expansion in India, including its retail and manufacturing presence,” wrote D.A. Davidson analyst Tom Forte this week.
China, Apple’s older growth driver, will also be closely watched. Greater China, including Hong Kong and Taiwan, is Apple’s third largest sales region, and it has reported two consecutive quarters of revenue decline despite the region reopening after strict COVID-19 lockdowns.
“In our conversations, most investors feel that a soft China could pose a risk to the numbers and further commentary, but we feel that Apple’s position in China is on a solid footing and that the company is likely to see only a small, if any, decline in its iPhone sales,” wrote Piper Sandler analyst Harsh Kumar.
Kumar added that if China ends up performing poorly, it could be offset by strong sales momentum in India.
Given that Apple primarily manufactures in China, investors will want to hear about the company’s ability to overcome the supply chain challenges that have hindered sales in the past two years. Analysts suggest that if Apple has stockpiled enough parts to meet production needs, it could help improve margins.
Services growth and AI acceleration
Apple’s profitable services division includes monthly subscriptions such as Apple Music, warranties under AppleCare, fees from the App Store, advertising revenue from search licensing agreements with Google, payments from Apple Pay, and other products.
Wall Street values regular and steady growth in Apple’s services business, as the margins on services are higher compared to hardware sales. Analysts are particularly interested in seeing the services segment regain momentum after a few quarters of weak growth due to sluggish App Store software sales.
Apple has indicated a 5% year-over-year increase in services, but analysts will be looking for signs of even stronger growth.
“For the Services business, we expect year-over-year revenue growth to accelerate from the +5% level expected in the fiscal third quarter, with our checks suggesting online advertising has improved,” wrote Deutsche Bank analyst Sidney Ho.
Given the industry-wide focus on artificial intelligence, analysts will likely inquire about Apple’s AI initiatives, following a recent Bloomberg report that the company is developing an internally-built AI model similar to ChatGPT. However, it should be noted that Apple is unlikely to disclose detailed information about its internal projects.
“With the official introduction of Vision Pro, we expect Apple to provide updated comments on its AI aspirations, albeit likely at a high-level,” wrote Wells Fargo analyst Aaron Rakers.
Estimates
Apple reports its results by product line, offering investors insight into which businesses are thriving and which ones are experiencing a downturn.
FactSet estimates indicate that iPhone, iPad, and Mac sales are all expected to decline on an annual basis, with iPad sales projected to drop nearly 11%. Wearables, which includes headphones and Apple Watch, and will likely include Vision Pro when it becomes available, is projected to decline by less than 1%.
However, analysts anticipate a 5.2% year-over-year increase in Apple’s services business, which would be a bright spot in the report.
Here are the expectations from Wall Street, based on FactSet estimates:
- Revenue: $81.7 billion
- EPS: $1.19 per share
Here’s what to expect from each of Apple’s product lines, based on FactSet estimates:
- iPhone revenue: $40.2 billion
- iPad revenue: $6.4 billion
- Mac revenue: $6.3 billion
- Other products: $8.3 billion
- Services: $20.7 billion
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