Apple set for stellar service sales

Earnings need to live up to this week’s record high in the shares

Apple reports Q4 earnings on Wednesday 30^th October, after the U.S. market close. Here’s what to expect.

Stock fall

Apple shares may be slipping on Tuesday, but a new record high at the start of the week, just days away from the release of its quarterly earnings, shows investors expect a progressive quarter, despite known challenges.

Did we mention services?

The main focus of the three months ending on 30^th September will almost inevitably be services, services and more services. Revenue growth in the segment that includes Music, TV, App Store, Health, Pay and more, will continue to eclipse growth shown by Apple’s still-dominant revenue generator, iPhones. Still, services will take a few more years to approach anything like the sales contributed by handsets. Consequently, overall revenue growth is expected to be slim in Q4.

High hopes return

Yet the stock’s leading position in the relative performance of FAANG shares this year signals that investors are now fully aboard the services story. The lack of 5G in the latest iPhone points to only a modest overall growth in Q4, ahead of Apple launching that facility in September 2020. Instead, investors have set their sights on a potential record quarter for services. Wall Street expects a 21% surge. If it materialises, it would be one of the strongest quarterly growth rates in the segment Apple has ever reported.  A rebound in mobile-game sales in China has been cited as a potential boost for App Store revenue, which accounts for about a third of service sales.

China challenges

Given such optimism though, risks to the stock now include unforeseen headwinds that could throw service sales off course. The slowdown in China could yet have difficult to predict consequences. The recent discovery of iPhone demand elasticity to higher prices is already an awkward though inescapable happenstance that may be tied to plateauing China and U.S. growth.

Trade, tariffs, dollar

Additionally,  gross margin impact from recently tariffed Mac Pro, though probably modest, would be a warning about more painful compression should the trade war escalate with Apple in the crossfire. The potential impact on Apple’s gross margins should the trade war escalate will be a conference call hot topic. With the dollar hitting levels not seen since May 2017 at one point in the past quarter, investors will also be alert to any signs that slower growth outside of the U.S. is beginning to bite into Apple’s outlook.

Key financial expectations

Adjusted Q4 EPS: $2.18, -5.7% year-on-year

Q4 Revenue: $53.81bn, +1%

Q4 gross margin: 37.9% vs. 37.6% in Q3

Q1 2020 revenue guidance: $86.51bn, up 2.6%

Q1 2020 EPS: $4.42, up 5.5%

(Consensus forecasts compiled by Bloomberg)