Apple now has a long way to fall again

A 40% share price surge from January lows reinstates a high bar for earnings.

With a market value almost $300bn richer this year, it’s possible the stock will head lower whether tonight’s second quarter results hit the mark or not. The shares tumbled to a 21-month low in January after worse-than-expected iPhone sales. Since then, an elastic rebound of global markets, including in China—Apple’s erstwhile fastest-growing region—helped propel the stock’s recovery.

Investors have bid the stock to 16.4 times each dollar of earnings expected in Apple’s current financial year. That’s 11% higher than Apple’s long-term average rating, according to Bloomberg data.

The emergence of Apple’s digital services as a possible replacement growth engine is the key fundamental lift. But with handsets still accounting for around 60% of revenues, sentiment won’t escape iPhone developments for many years.

Here’s what investors are looking for from Apple’s Q2 earnings according to consensus forecasts compiled by Bloomberg.

• iPhones: around 40-plus million units are forecast to be sold, generating $30.5bn, 19% down on the year
• Digital services: A 22% rise to $11.2bn is expected. Investors are keen to hear about uptake of new services launched last month, like video streaming, though they may not contribute much to sales yet
• Qualcomm: A legal spat with the chip maker over, the path to 5G iPhones seems clearer. But how soon? Apple’s stock could be punished if the tech still seems too far off; raising the question of whether the company got the best possible settlement
• Buybacks: Apple is taking the scenic route to its goal, so Apple’s cash hoard has actually grown since the CFO said it wanted to return almost all capital to shareholders. Since the group usually updates pay-out policy in Q2, a new $100bn buyback is widely anticipated, with dividends hiked 16%
• China: Given global drama related to tariffs and a slowdown, Wall Street has the least visibility into the effect of Apple’s huge dependence on the world’s second largest economy
• The basics: Revenues are seen at $57.5bn, 6% lower than Q2 2018.
• EPS is forecast at $2.37 which would be down 11%
• The Q2 gross margin foreseen of 37.6% would be the first below 38% in 6 quarters
• A big share price upset is likely if Apple doesn’t forecast a gross margin rebound to 38% in Q3