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Don't Be Surprised by Apple Inc.'s (Nasdaq: AAPL) Q2 Earnings

Following its extraordinary beat last quarter, expectations for Apple Inc.'s (NASDAQ: AAPL) earnings are even higher than usual.

With Apple having such an outsized influence on the markets, even investors who don't hold the stock will be watching for Apple's Q2 earnings report after the closing bell today (Tuesday).

Still, with its stock having tumbled 11% in the past two weeks, from its peak of $640 April 10, Apple needs to beat Wall Street expectations.

If Apple earnings disappoint — as occurred in the September quarter last year — the stock will get beaten down even further. Such negative news would push the stock toward $500.

The consensus estimates for Apple's Q2 earnings are $9.99 per share on revenue of $36.6 billion, which most analysts believe is achievable.

In fact, just in the past week several analysts, such as Shaw Wu of Sterne Agee and Bill Shope of Goldman Sachs, again raised their estimates for iPhone and iPad sales.

However, Money Morning Chief Investing Strategist Keith Fitz-Gerald isn't so sure.

"I think Apple is going to miss on key sales figures related to the iPad," Fitz-Gerald said. "If they do, it's likely to spark multiple downgrades in the weeks ahead, leading to a downside "snowball effect' as the stock corrects further."

Should Fitz-Gerald be proven right – and he did correctly predict Apple's swoon in a March 27 Money Morning article – investors shorting AAPL will profit and those waiting for a pullback will get a chance to jump in.

"If I get a sense that there's a point we can step into the fray, we'll be buying," Fitz-Gerald said. "Even as we speak, institutional traders are looking to short the stock and pound the price down even more."

Fitz-Gerald thinks Apple eventually will resume its climb toward $1,000 a share, and that much of the recent decline was bound to happen to a stock that had soared 75% in just five months.

iPhone Sales Critical to Apple Earnings

Whether Apple beats expectations or not will largely depend on how well the iPhone sold.

The iPhone accounts for more than half of Apple's revenue. It's also the product with the highest profit margins (over 70% for the iPhone 4s).

Many analysts see the iPhone making up an even bigger than usual share of Apple's Q2 revenue, which will boost margins.

Concern over iPhone margins is one of the reasons AAPL stock has swooned.

Earlier this month research firm BTIG forecast that the U.S. carriers such as Verizon Communications Inc. (NYSE: VZ) and AT&T (NYSE: T) are seeking to pay less to handset makers, including Apple.

As one of the most expensive smartphones on the market, it is also one of the most heavily subsidized, which has eaten into the profits of the carriers. BTIG predicted lower iPhone sales next quarter as the carriers increasingly push cheaper Android-powered smartphones.

In addition, Verizon reported lower-than-expected iPhone sales last week, but the impact of that should be offset by higher iPhone 4s sales elsewhere in the world. For example, the iPhone 4s launched in China in the March quarter.

The iPhone consensus, or "number to beat," is 30.5 million units.

iPad Is An Apple Earnings Wild Card

Predictions for sales of the iPad, Apple's second-most important product representing about 20% of sales in the December quarter, are all over the map.

The most pessimistic analysts are calling for sales of just 9 million; the most optimistic see sales of over 15 million. Consensus is for about 12 million, which would be a year-over-year increase of 155%.

Apple did announce that the third generation iPad, which went on sale March 7, sold 3.3 million units in its first three days. Demand was so great initially that customers who ordered on line were forced to wait two to three weeks as supplies ran short.

And the company was able to launch the new iPad in 35 counties within those two weeks, which should give sales of the third generation of Apple's tablet even more juice.

The big question is whether iPad 2 sales were hefty enough in the two months-plus leading up to the debut of the new iPad to push sales past analyst expectations.

"Feedback has clearly been positive, and we suspect that expanded global distribution of the new [iPad] model should help bolster sales rates while offering the iPad 2 at lower price points should contribute to the expansion of Apple's tablet franchise," Kevin Dede, an analyst at Auriga, told The Independent.

Beyond Apple's Q2 Earnings

Apple's other units, such as its Mac business and iTunes Store, account for far less of Apple's revenue and are not expected to have a major impact on Apple earnings, although both are expected to show solid year-over-year growth.

Still, an unusually high pop in either could get investors' attention.

Such is always the case with Apple earnings; even with dozens of people poring over its every move, you can never quite be sure what you're going to get.

And perhaps even more important than Apple's earnings numbers will be any guidance the company gives.

After all, it will be future growth in the iPad and iPhone, as well as any possible "Next Big Things" that will drive AAPL toward that magical $1,000 a share target.

"We are still looking forward to iPhone 5 later this year, China Mobile on the horizon and an Apple TV," Brian White, senior analysts at Topeka Capital Markets, said in an interview on Yahoo! Finance's Daily Ticker. "We talk about Apple fever rising to $1 trillion market cap. I think that's something we'll look back in three to five years and laugh about when it's a multi-trillion-dollar company."

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  1. richard weinstein | April 24, 2012

    I wouldn't be surprised if this quarter's numbers are less then last quarter's because Christmas was included in the last quarter. Probably doesn't matter too much what happens at day's end – in the long run AAPL will most likely be around doing very well – at least until someone comes along with more then apple has to offer which doesn't seem likely in the near term. I'm long with AAPL regardless of what comes off today. Probably a lot better then a savings account.

  2. ZZZ | April 24, 2012

    Two years ago I split one of my accounts and left half of it in an aggressive growth fund and put the other half in Apple stock. That ratio is now 33% growth fund and 67% AAPL. Better than a savings account? Yes! I have other accounts that are 100% Apple stock. Many of those shares were bought in 2003 for $7.49 (split adjusted). I'm long until I see a major change in fundamentals. I don't see anything like that yet.

  3. Timo Smith | April 24, 2012

    Apple's one big bubble waiting to burst. It is going through its hey days just like Microsoft and Oracle did in their days. Apple must continually reinvent its products to stay ahead of the pack. Product lifecycyles are getting shorter and competitors keep catching up with new Apple features meaning that Apple always needs to stay two steps ahead. Where is that innovative spark going to come from after Jobs?

  4. Gergely Varju | April 24, 2012

    If market capitalization for a company is higher than the value of its assets and "10 years worth of its profits", I often wonder why? If you only hope people will buy AAPL stock for even more money, it is a bubble. If you expect such rapid growth in their profits, something unexpected, it can be either a good choice or wishful thinking of a delusional investor.

    AAPL has plans for many years, but if it sticks to older plans it cannot react to the market. Have we seen any big new product that is succesful that wasn't planned before? No.

    Yes, iPads are getting popular in some circles. You see how they can replace laptops in certain areas.

    But replacing a MacBook Air with an iPad won't help AAPL. But iPad doesn't even run a full photoshop, or a DTP suite. It doesn't work well with SAP, it is hard to use it with word processors, it doesn't work well with CAD, CAM, etc.

    With Windows 8, we expect to see tablets that are compatible with existing enterprise applications, CAD, CAM software, etc. and when people start carrying them, they will have to ask themself: do I have to carry another tablet with me for entertainment? If their business tablet will be fun enough a lot will stop buying iPads.

  5. Rbama | April 24, 2012

    Is the S.E.C. investigating what appears to be manipulation of this stock ? Does anyone know ? What I am seeing in the market today appears to be corruption in it's worst form while the government stands back and does nothing, or so it seems.

    We have many laws against gambling but what I am seeing happen to Apple stock must be considered fair play ? What is happening today is designed I believe to take the money of common investors which ends up in foreclosures, bankruptcies, mentally and financially broken individuals, and no one seems to care.

    It is easy to say stay out of the market if you do not understand it. However, some people look to the market for income and need a level playing field, not one which is filled with land mines. We need to be able to look at a companies performance and make good decisions. What we have now is the media, analyst, journalist, trading systems, snake oil, and the list goes on.

    As much as I hate to even think it, this country is broken.

  6. ABDULLOKH | December 25, 2012


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