stocks recently soared to new all-time highs amid heightened investor expectations of June quarter earnings expected after the closing bell on Tuesday. But it’s the launch of the next generation of iPhones, expected to be unveiled in September, that could be the real difference maker.
Apple’s recent rally has not allayed concerns about the stock. Increasing regulatory scrutiny of Big Tech in general and Apple (ticker: AAPL) in particular, with a specific focus on the fees Apple charges developers who distribute applications on the company’s App Store for iPhones, iPads, and Macs , is obvious. There are also concerns about difficult year-over-year comparisons, with some investors fearing that the recently strong growth in Mac and iPad sales will slow as the economy returns to more normal conditions. Others are nervous that the next set of iPhones will offer only incremental improvements, and that demand could disappoint.
But no one seems to worry too much about earning itself. Wall Street’s consensus for the fiscal third quarter is $72.9 billion in revenue and earnings of $1 per share. Even analysts who are cautious about the stock think those numbers are too low. For example, BofA Global Research analyst Wamsi Mohan forecasts revenue of $77 billion, with earnings of $1.05 per share, driven by the strength of the company’s hardware portfolio. However, Mohan still maintains a neutral rating and a $160 price target for the stock, warning that the company will face tough comparisons in the coming quarters given the spike in Mac and iPad sales during the pandemic.
He has a point. In the March quarter, Apple sales grew 54%, driven by strong growth across the portfolio, with sales up 66% for iPhone, 70% for Macs, 79% for iPads, 25% for wearables and 27% for services. Street consensus estimates for the June quarter ask $34.2 billion in iPhone sales, $7.2 billion for iPads, $7.9 billion for Macs, $7.8 billion for wearables, home and accessories, and $16.3 billion for services.
The company did not provide a detailed outlook for the quarter, but warned that sales could be cut by as much as $4 billion due to a tight supply of Macs and iPads due to component shortages.
Still, Wedbush analyst Dan Ives thinks Apple is heading for another overall blow, driven by continued strong demand for iPhone 12, with demand particularly strong in China. “While the chip shortage was an overhang for Apple during the quarter, we believe the strength of iPhone and Services in the quarter neutralized any short-term weakness that the Street had anticipated three months ago,” Ives wrote. The analyst says Apple remains its favorite large-cap tech pick, taking a “1-2 punch” from services and iPhone demand. He thinks the company could reach $3 trillion in market cap by 2022, down from just under $2.5 trillion today. Ives will keep its Outperform rating and target price of $185.
Canaccord analyst T. Michael Walkley He also raised his buy recommendation for Apple stock, while raising his price target from $165 to $175. He also expects June quarter results to beat Street’s estimates. An interesting question is whether Apple will return to providing quarterly guidance, a practice the company has suspended during the pandemic. If they do, Walkley says, expect the forecast to exceed current street projections.
“Apple is well positioned to continue to benefit from the 5G upgrade cycle, and we anticipate strong overall growth trends as 5G smartphones grow and the installed base grows with higher margins of service revenue,” he writes. “Apple’s ecosystem approach, which includes an installed base of more than 1.65 billion devices worldwide and now more than 1 billion iPhone users, should continue to generate strong service revenue.”
But the big news may be yet to come. Once the company has passed past earnings, Apple investors will focus on the iPhone launch in the fall. (Let’s call it iPhone 13, although Apple hasn’t specifically named the new line.) Ives sees incremental improvements, including Lidar capabilities in all phones, that will improve their usability for augmented reality applications. More importantly, his observation that about 250 million of the installed base of nearly 1 billion iPhones are at least 3.5 years old and in need of an upgrade.
As Morgan Stanley’s Katy Huberty has pointed out, Apple stocks tend to outperform the market on the way to new phone launches. There’s no reason to think this year will be any different. Expect a strong June quarter from Apple, with likely higher highs as we approach the fall.
Then we can reassess.
Write to Eric J. Savitz at firstname.lastname@example.org