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The Apple Q1 earnings, expected after the market close tomorrow (Tuesday), won't blow estimates out of the water, but will be better than Wall Street has predicted.
The analyst consensus is for Apple Inc. (Nasdaq: AAPL) to earn $3.23 per share (18.22 billion) on revenue of $76.67 billion. That would beat last year's Q1 EPS of $3.06 on revenue of $74.6 billion.
The consensus forecast also falls in line with Apple's Q1 earnings guidance for revenue of $75.5 billion to $77.5 billion.
That $18 billion Apple reported in its Q1 earnings a year ago, by the way, was the biggest quarterly profit by any company in history. Since Apple's Q1 earnings are always the company's biggest, any year-over-year increase will set a new record.
But the Apple analysts are more concerned with Apple's future. They're worried that Apple will lower guidance for the March quarter.
And that's because sales warnings from Apple suppliers have raised concerns of slowing iPhone sales growth. Sales of the iPhone are paramount to Apple's earnings because it accounts for two-thirds of the company's revenue.
Analysts from Morgan Stanley and Credit Suisse have predicted that iPhone sales will actually shrink in 2016.
More than a dozen have lowered their 12-month price targets over the past two months, although the average is still about $142 – 42% higher than the current AAPL stock price of about $100.
That's why Apple stock has dropped about 18% since early November, with the volatile markets over the past month amplifying the losses.
But as usual, the analysts are overreacting, both on the AAPL Q1 earnings as well how the company will fare through the rest of 2016.
Let's look at the December quarter first.
Analysts are worried the iPhone 6S models, introduced in September, have not sold as quickly as the iPhone 6 models a year before. While this is undoubtedly true, it doesn't mean the iPhone 6S is failing.
In fact, there are several reasons to believe iPhone 6S sales will be higher than predicted…
Why the Apple Q1 Earnings Will Surprise the Analysts Again
According to analytics firm Flurry, Apple accounted for an impressive 49.1% of all mobile devices activated in the week of Dec. 19 through Dec. 25. Samsung Electronics Co. Ltd. (OTCMKT ADR: SSNLF) was second with 19.8%.
And while Apple's share was 2.2 percentage points less than last year, the small decline suggests iPhone sales did not drop off as steeply as many fear.
And then there's China. Analysts have worried the slowing Chinese economy and the maturing of the Chinese smartphone market will hit iPhone sales. According to research firm IDC, the smartphone market in China will only show growth of 1.2% for 2015.
But there hasn't yet been any evidence to show that either of those issues has affected iPhone sale there. In its Q4 earnings, for example, Apple reported 99% year-over-year growth in its China sales.
According to data from the China Academy of Telecommunication Research, non-Android smartphone shipments were up 33% in the December quarter. The iPhone would make up the lion's share of that segment.
Another factor analysts are ignoring is that while the overall Chinese smartphone market is maturing, a lot of phone buyers are trading up to better devices.
Specifically, they're trading in their old 2G and 3G phones for 4G phones. At China Mobile, the largest of the country's three carriers, the 4G customer base grew by 64.6 million in the December quarter.
The iPhone competes exclusively in the 4G segment, so Apple had to have gotten a massive boost from the explosion in 4G adoption in China in its Q1. We're talking 3 million to 4 million more iPhones over the same quarter last year.
The consensus forecast is for Apple to sell 76.5 million iPhones in the December quarter, an increase of 2 million year over year, or about 2.6%. This is viewed as disappointing compared to the 22% growth rate of Q4, or last year's spectacular 46%.
But Apple is likely to beat the analyst consensus on iPhone sales by several million. And while growth of 5% to 8% won't bowl anyone over, it's still impressive given how many iPhones Apple sells. Such a beat should nudge Apple stock higher as well, at least in the immediate wake of the earnings announcement.
That brings us back to the March quarter…
What About Apple Earnings in Q2?
Frankly, Wall Street is much more focused on that March guidance than the Apple Q1 earnings numbers.
Apple's guidance on the March quarter, and whatever additional information CEO Tim Cook chooses to provide during the conference call, will set the tone for Apple stock for most of 2016.
Analysts have interpreted the widespread Apple supplier struggles as a sign of slackening demand for the iPhone for Apple's Q2 and Q3. But supply chain problems aren't always the best gauge of how Apple is doing.
Apple has in the past gone against the grain of Wall Street's conventional wisdom, and may well do so again tomorrow.
But it will be what Apple delivers in 2016 that determines whether Apple stock is just suffering a bump in the road or something more serious.
Don't give up on Apple too soon, though. The iPhone still has a lot of runway in China. And it's just starting to gain traction in India, the next big growth market for smartphones.
Then there's the iPhone 7 due in the fall, which many expect will be a major upgrade with at least one upgrade-compelling feature.
So while investors need to keep a close eye on the Apple Q1 earnings, don't lose sight of the bigger picture. If Apple's 2012-2013 slump proved anything, it's that underestimating this company is ill-advised.
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