Apple Q4 Earnings: Why iPhone Worries Are Overblown (AAPL)

Wall Street is anxiously awaiting the Apple Q4 earnings, but not because it wants to know how many iPhones, Macs, and iPads the company sold in the last quarter. They know those numbers will be strong.

Apple Q4 earningsAnalysts instead will focus on the guidance Apple Inc. (Nasdaq: AAPL) will give for the current quarter. That's because the current quarter - in recent years Apple's biggest - will tell investors how well the new iPhone 6S models are selling.

Although the iPhone 6S debuted in early September, it didn't go on sale until the end of the month. Only two days' worth of sales of the new models will be included in the Q4 AAPL earnings.

For the record, Wall Street forecasts that the Q4 Apple earnings will bring in profits of $1.88 a share on $51.1 billion in revenue. That would be a 32% increase in earnings per share (EPS) and a 21.4% increase in sales year over year. Sales of the iPhone are expected to rise to 48 million to 49 million units from 39.2 million in the year-ago quarter.

The iPhone is the primary focus of Apple earnings because it accounts for about two-thirds of the Cupertino, Calif.-based company's revenue and profits. Apple stock is up more than 600% since the original iPhone's June 2007 introduction.

Last Year's iPhone Will Boost Q4 Apple Earnings, but Then...

And last year's iPhone 6 was a stunning success. Huge sales delivered year-over-year growth numbers remarkable for a company of Apple's size. But it means that starting with the current quarter, sales of Apple's products will get compared with monster year-ago numbers.

Many analysts have already projected that iPhone sales growth will slow from about 35% in the 2015 fiscal year to the single digits in FY 2016.

"Sentiment [on Apple] has gone from glass half-full to glass half-empty in the last three months," FBR Capital Markets senior analyst Daniel Ives told International Business Times. "The Street wants to see a good quarter, but the big focus is on December guidance."

Anticipating a disappointing outlook, investors took a 3.26% bite out of AAPL stock on Monday, dropping the Apple stock price $3.88 to $115.20.

While the iPhone 6S isn't likely to post the 35% growth of its predecessor due to the large compare numbers, it should do a lot better than single digits.

Here's why...

Why the iPhone 6S Won't Drag Down Apple Stock in 2016

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

The negative Wall Street sentiment ignores at least five catalysts that indicate the iPhone 6S will be able to keep the momentum of its predecessor going.

Take a look...

Catalyst No. 1 - China: About 30% of Apple's global sales now come from China. And while the slowing Chinese economy has had a negative impact on other U.S. companies, Apple has seen accelerating sales there. In the last quarter, Apple reported a year-over-year sales increase of 112% in China. Analysts see China as a potential problem, but the new iPhone models will add a fresh incentive to buy. The iPhone's popularity in China keeps increasing because of the next trend...

Catalyst No. 2 - Apple Brand Power: The Apple brand has always been strong but keeps getting stronger. For more and more people, particularly in emerging economies like China, Apple is an aspirational brand. That means many consumers will choose an iPhone over many near-equivalent, cheaper options. This brand power is paying off now in China and in the next year in another emerging economy - India.

Catalyst No. 3 - India: Apple has struggled to get a foothold in the India market because Indian law prevented it from opening its own stores there. But now AAPL has solved that problem. It is partnering with India-based electronics chain Croma on a "store within a store" program, much like it does with Best Buy Inc. (NYSE: BBY) in the United States. India is the last big largely untapped smartphone market in the world and will prove fertile ground for the iPhone. In the last quarter, Apple reported sales growth in India of 93%, a sign of what's to come.

Catalyst No. 4 - Late Adopters: Not all iPhone owners upgraded to the bigger screens of the iPhone 6 over the past year. Sterne Agee estimates that more than half of current iPhone owners have a model with a 4-inch screen or smaller. That means the wave of upgrading triggered by the larger screens of the iPhone 6 is far from over and will boost sales of the iPhone 6S in the quarters ahead.

Catalyst No. 5 - New Subscription Plan: An iPhone subscription plan Apple introduced at its September event was just as important as the unveiling of the new iPhone 6S, though it got much less publicity. For a monthly fee, customers essentially lease the latest iPhone from Apple. Each year, they trade in the old model for the new one. It creates a revenue stream for Apple as well as a pipeline of "last-year's model" iPhones the company can sell for less to attract more budget-conscious customers both in the United States and emerging markets like China and India.

We expect good news from the Q4 Apple earnings. And the guidance for Q1 also should be a lot better than many analysts fear, given all the positive catalysts for the iPhone 6S going forward.

The Bottom Line: Analysts are worried that the Q4 Apple earnings will include disappointing iPhone sales guidance for the current quarter earnings. But the iPhone 6S has enough tailwinds to keep driving sales higher - and by more than just a few percentage points. Expect double-digit iPhone sales growth though in AAPL's FY 2016 despite the tough comparisons to the smash-hit iPhone 6 of last year.

Microsoft Reborn: Longtime Apple rival Microsoft Corp. has rediscovered its mojo in the past couple of years. This fall, Microsoft showed that it has embraced a philosophy it once disdained - a philosophy that has brought Apple incredible success. Here's what Microsoft is doing, and how it will generate billions of dollars in value for MSFT investors...

Related Articles:

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.

Read full bio