Apple earnings preview

Apple is expected to report a 7.1% rise in earnings for the fiscal first quarter (Q1), to $4.17 per share, while revenue is forecast to drop 5% to $84 billion. It has beaten on earnings in eight of the last eight reports, and seven out of the last eight for revenue. On average, results day sees a move of 4.4%, while current options pricing suggests a move of 4.46%.

A warning on revenues for Q4 prompted a rout in Apple shares recently, and while there has been a recovery since then, it has been relatively anaemic when compared with other big names, and indeed with the headline Nasdaq and S&P 500 indices. This fall from grace was compounded by Apple’s decision to stop reporting iPhone sales, raising suspicions that this metric was already falling, and that the firm was trying to reduce the amount of bad news for investors to digest when earnings roll around.

Despite its attempts to focus on software, the iPad and other products, Apple continues to be driven primarily by iPhone sales. The product generates 60% of Apple’s revenue, though with around 700 million iPhones in use around the world the firm still has an impressive user base for replacements and upgrades.

Cloud services are becoming more important as a revenue segment, but they have a long way to go before they represent a meaningful element in earnings that can help offset lower iPhone sales.

Apple currently trades at 12.7 times forward earnings. The five-year average is 13.4; at the end of 2018 the forward price-to-earnings (P/E) was around 11, so some of the valuation premium has been removed. Nonetheless, Apple is still cheaper on a forward earnings basis than at any time since the end of 2016.

Apple’s rally off the lows of December has run into resistance around $158. Gains above this level have proven hard to sustain since 28 December. Rising trendline support from the January low around $142 means that we are likely about to see a significant outbreak of volatility soon. Apple stock has broken the sequence of lower highs seen in December, and near-term targets to the upside include $167 and $172. Meanwhile, a drop below rising support first challenges $150, and then down to $142 and the January lows.