Apple expected to flash the cash

Bonanza
Who’s afraid of weak iPhone sales? Perhaps not Wall Street so much anymore as investors eye a bonanza of Apple cash that could be announced with Tuesday evening’s quarterly results. Looking at the stock’s rise 1.6% rise on Tuesday afternoon against the backdrop of another mostly negative session on Wall Street, it appeared much-discussed worries over the $835bn company’s second-quarter iPhone sales and top-line growth had been put aside. 

Plateaux
This, after Apple shares went almost nowhere since early January, standing 1% lower for the year. Being the largest listed company in the world and generating tens of multibillion dollars in sales was no immunity to the stock market gyrations of the last few months. With key suppliers keen to explain weak demand, even a usually circumspect Apple has done little to discourage the notion that iPhones sales growth had plateaued again.

iPhone X out
Wall Street on average expects Apple to have sold 52.8 million handsets in the second quarter, a swifter decline than usually seen in a quarter following the launch of new handsets. In Q1, new iPhone 8 versions and the flagship iPhone X catapulted units to 81.02 million. Normally, handset sales would ebb somewhat after such a leap, but current forecasts make the expected decline look more like a collapse.

Low, for Apple

The knock-on effect for revenue expectations has also been sobering. Consensus data compiled by Estimize, an open financial estimates platform, suggests investors see Apple revenues growing 16% to $61.53bn in the second quarter, a modest rise by Apple’s recent historical standards, particularly following new handset releases. Apple had forecast a range of $60bn-$62bn in February.

Cash centre stage
Still, Apple shares trading higher at the time of writing were a sign that demand and top-line concerns were moving out of focus. That was not entirely surprising. Apple’s CFO, Luca Maestri said in February the company wanted to reduce its $285bn cash pile to “approximately zero”. That triggered speculation that Apple’s humongous $50bn-a-year pay-out programme could rise even further. Rough calculations centre on the group’s $122bn outstanding debt and a new $38bn tax charge spread over 8 years. The latter will be the cost Apple faces to return cash held overseas; huge, but still financially more attractive than under previous U.S. tax rules. (In the past, Apple resorted to debt to pay for buybacks because doing so was cheaper than repatriating cash.) Even including modest hypothetical M&A and the group’s typical $30bn a year in working capital, Apple could double annual pay-outs to $100bn and still end up with slightly higher net cash in 2018.

Service levels
Investors are unlikely to ignore weak financials entirely. With Apple until recently having pushed revenues from services as a possible key top-line driver, the stock may take hits if music, app store and iCloud sales disappoint again, as per Q1. Expectations for the June quarter are also now in focus, with consensus for Q3 revenues of $46.2bn, according to Thomson Reuters data, at least until recently. Large brokerages are now reducing forecasts. If Apple follows suit on Tuesday evening, investors won’t take it well.  
Still, the level of investors’ tolerance will probably be proportionate to how much more cash Apple flashes.