Apple Q3 Earnings Surprise Will Reignite AAPL Stock

July 21 earnings update: The Apple Q3 earnings beat expectations, but only barely, disappointing many investors. Despite some very strong year-over-year numbers, Apple stock fell as much as 8%  in after-hours trading.

AAPL's earnings per share of $1.85 came in above revised forecasts for income of $1.81. Revenue of $49.6 billion just edged expectations for $49.43 billion.

Unit sales of the iPhone, however, also barely beat Wall Street forecasts. Apple sold 47.5 million, versus expectations for 47.25 million.

Investors may have also been uneasy on Apple guidance. Apple expects revenue of between $49 billion and $51 billion for its Q4. Analysts had been forecasting revenue of $51 billion.

Nevertheless, Apple revenue was up 33% over the period a year ago, and profits were up 38%. Sales of the iPhone increased 35%. And Mac sales were up 9%, even while overall PC sales were down 9.5% in the second quarter.  Unit sales of the iPad, however, fell 18% year over year.

Apple ended the quarter with $203 billion in cash.

 

Original story:

The Apple Q3 earnings will not only beat expectations, it will smash them.

Apple Inc. (Nasdaq: AAPL) is scheduled to report its fiscal Q3 earnings after the market close on Tuesday. And even with expectations rising, the signs point to the Cupertino, Calif.-based tech giant stunning Wall Street (again).

AppleInvestors apparently are sensing an Apple Q3 earnings beat. Since dipping to $120.07 on July 9, AAPL stock is up 6% to $129.40.

The main reason, of course, is that sales of the iPhone 6 - which have remained strong even nine months after its debut - will far exceed the analyst consensus.

For Apple, the iPhone drives the earnings train. It contributes 64.3% of the company's revenue.

The Wall Street consensus is for iPhone sales of about 47 million. But a warning from rival Samsung, and the trend of rising iPhone popularity in the huge Chinese smartphone market, suggests the number will come in significantly higher - past 50 million units.

And not only is it likely Apple sold more iPhones in Q3, it sold pricier models than many analysts may have assumed.

A just-released Consumer Intelligence Research Partners (CIRP) survey said the number of iPhone buyers opting for the bigger, more expensive iPhone 6 Plus rose to 29% in the June quarter from 22% in the previous quarter.

The amount of flash storage rose by 6%, which means more customers bought iPhones with greater memory capacity. Much of the higher price Apple charges for iPhone models with more memory becomes profit.

The combination means the Apple Q3 earnings will blow past Wall Street expectations for $1.79 a share on sales of $49.1 billion.

UBS analyst Steve Milunovich, who has seen the CIRP numbers, boosted his forecast to $2.00 a share on sales of $52.3 billion.

But the Apple Q3 earnings report is likely to provide a few more positive surprises...

More Reasons for an Apple Q3 Earnings Blowout

In addition to profits from the iPhone, Apple will get a nice little boost from the Apple Watch.

Many analysts were thrown off earlier this month when research firm Slice reported that Apple Watch sales had plunged 90% from the device's debut in April.

But Slice only has data from online sales in the United States. While it's still difficult to predict, Apple Watch sales for Q3 should fall in the 5 million to 10 million range.

And as a new product with a great margins, the Watch will make a measurable contribution to Apple's bottom line - on top of whatever the iPhone 6 does.

And like the iPhone, some under-the-radar news will enhance the Watch's profitability. That same Slice survey revealed that one out of every five Apple Watch buyers is purchasing an extra band. And the bands Apple sells are insanely profitable.

For example, Apple charges $49 for the entry-level sports band - an item that costs Apple less than $3 to produce.

Even the Mac Will Contribute to the Apple Q3 Earnings

One other bright spot in the Apple Q3 earnings will be Mac sales, which always get overshadowed by the iPhone and Apple's newer products.

But the Mac still contributes 15.2% of Apple's revenue, not that far behind the iPad's 19.1%.

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Over the past few quarters, Mac sales have continued to grow despite a shrinking PC market. Another quarter of double-digit growth will be good for another small addition to Apple's EPS.

The new Apple Music service, on the other hand, is too new and too small to have much of an impact. But in a few years, if Apple can grow the subscriber base substantially, that could change.

Unfortunately, the iPad will remain the black sheep in the Apple Q3 earnings. Its year-long slump will continue in Q3. Analysts expect a year-over-year decline in iPad sales of about 19%, and that's just about where it will be.

Apple may have an answer in the pipeline, however, if the rumors prove true and the company releases a larger 12.9-inch iPad Pro in the fall.

Another strong quarter is just one more stepping stone toward Apple reaching the milestone of a $1 trillion valuation. That means an AAPL stock price of at least $174 a share and an annual EPS of about $11 a share - just $2 above where it is now.

For investors, the Apple Q3 earnings may be a buying opportunity. AAPL stock usually drops in the days following an earnings report, even when the earnings are excellent.

Apple stock is a buy in any case. That target of $174 is a gain of 35% from where AAPL trades now.

Follow me on Twitter @DavidGZeiler.

Why Apple Stock Is Headed for $200: With multiple catalysts, a price of $174 a share might be too low. Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks Apple stock will get to $200 a share within two years. Here's why Keith is so bullish on AAPL stock...

 

 

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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