5 p.m. Update: The Apple stock price rose about 2.5% in after-hours trading following a surprisingly strong Q1 2017 earnings report.
AAPL stock was trading at about $124.50 Tuesday evening after the company reported record quarterly revenue of $78.4 billion, beating expectations for sales of $77.44 billion.
Apple also beat on income. Earnings per share was $3.36, easily topping the consensus forecast for $3.23.
"It was a dynamite quarter," CEO Tim Cook told CNBC.
The impressive numbers were driven by a strong showing by the iPhone 7, which sold 78.3 million units. The forecast was for 77 million units.
Mac sales also eked out a 1% gain in unit sales, good for a 7% increase in revenue year over year.
The iPad remained a disappointment, with unit sales plunging 19% and revenue falling 22%.
But Apple's Services division performed well, with revenue increasing 18% over the same period a year ago.
The Apple Watch again remained hidden inside Apple's "Other" category. But the product did not appear to have a good quarter, as "Other" sales were down 8% year over year.
Original story follows:
The Apple stock price today (Tuesday) will almost certainly drop in after-hours trading unless the tech giant's Q1 2017 earnings are unexpectedly spectacular.
Apple Inc. (Nasdaq: AAPL) reports its Q1 2017 earnings after the market close today. The last calendar quarter of the year is Apple's first fiscal quarter.
While the Apple stock price has been on a good run - shares are up about 34% since bottoming out at about $90 last May and 17.5% since the iPhone 7 was unveiled in early September - today's earnings will be a "sell on the news" event.
The AAPL stock price today was hovering around $121, right about where it's been for the past three weeks.
Now, Wall Street isn't expecting a disaster.
But if the forecasts are on target, these year-over-year numbers won't thrill anybody.
These Numbers Are Bad News for the Apple Stock Price Today
According to FactSet, the analyst consensus is for revenue of $77.44 billion, a 2% increase over last year's $75.87 billion. The forecast for earnings per share is $3.23, $0.05 less than the year-ago number.
And Apple's share buyback program makes the earnings look better than they are. If you recalculate with the number of outstanding shares Apple had last year, the income estimates drop to below $3.10 a share.
Numbers like this won't excite investors spoiled by the 37% year-over-year profit gains in Q1 2015 and the epic 117% profit increase in Q1 2012.
Related: The Best Tech Stocks to Buy in 2017
Other than the headline numbers, Wall Street will focus on iPhone sales. The iPhone contributes about two-thirds of Apple's revenue and profits.
Revenue from iPhone sales is expected to be $53 billion, about 2.6% higher than the $51.64 billion sold in the Q1 2016 quarter. Unit sales are expected to rise from 75 million last year to 77 million.
Apple will need to outsell the iPhone forecast by a huge margin to keep the Apple stock price from dropping.
The news gets gloomier. Expected year-over-year drops in several of the company's other main businesses will add to the pressure on the Apple stock price today.
Bright Spots to Be Scarce in the Apple Q1 2017 Earnings
The forecast for the Mac, once a source of solid growth in a shrinking PC industry, is for a 3% drop from sales of $6.75 billion last year to $6.54 billion. Sales of iPads are expected to fall 4.2% from $7.1 billion to $6.8 billion.
Sales of the Apple Watch may remain a mystery unless Apple decides finally to break out these numbers rather than lump the product into the "other" category.
The FactSet projections have Apple Watch sales falling year over year, but this category could deliver a positive surprise. A clerk at a local Apple Store here in Maryland told me they couldn't keep the product in stock over the holidays.
If the company doesn't break out Apple Watch sales, keep an eye on the revenue for the "Other" category. The estimate is for sales of about $4 billion.
Apart from the Apple Watch, one other category has a good chance of giving Apple something to crow about: services.
Last year, services surpassed the Mac as Apple's second-largest source of revenue. Wall Street expects this category to grow 14% from $6.1 billion to $6.9 billion.
And while still dwarfed by the iPhone revenue, services revenue is the single best reason to buy AAPL stock on the dip that's likely to come in the wake of these earnings.
Let me explain...
Why Apple Stock Is a Buy Despite Uninspiring Earnings
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The biggest concern about Apple stock in recent years has been about the company's reliance on the iPhone for the bulk of its revenue and income.
According to research firm IDC, the growth rate of the global smartphone market has shrunk from 27.8% in 2014 to 3.1% in 2016. That's making it increasingly difficult for Apple to grow iPhone sales.
Conventional wisdom on Wall Street has it that Apple needs a new "next big thing" both to reduce its reliance on the iPhone and to supply earnings growth.
What they've missed is that such an animal has emerged right under their noses in the form of Apple's services business.
With services such as Apple Music and Apple Pay, the company has found ways to generate revenue from its vast customer base. Last year, Credit Suisse estimated that Apple has about 588 million users worldwide.
That's a great starting point for a lucrative services business. And it's already paying off.
How Services Will Boost Apple's Valuation - and Stock Price
While Apple's $25 billion in annual sales from services represents just 11.5% of the company's total revenue, it's nearly equal to Facebook Inc.'s (Nasdaq: FB) annual revenue of about $27 billion.
This matters because companies that thrive on steadily recurring revenue that comes from services are typically valued much higher by investors than companies that depend mostly on one-time sales of products.
Facebook is a case in point. Its advertising revenue comes from customers who buy on a regular basis. And that's reflected in Facebook's price/earnings ratio of 50 - way higher than Apple's P/E of 14.65.
Apple is using its strong hardware sales to transition into more of a services company. The further along this transition goes, the more valuable Apple stock will be.
Just look at Adobe Systems Inc. (Nasdaq: ADBE). Six years ago, Adobe sold its products, such as Photoshop and InDesign, as one-time sales. Its P/E was about 20.
But Adobe began transitioning to a subscription model for its software in 2011. Now Adobe's P/E is 49 - more than double. And it's had a tremendous amplifying effect on the company's modest 39% sales increase.
Since September 2011, the Adobe stock price has skyrocketed more than 350%.
Apple isn't going to stop making iPhones, of course. But it is nurturing a symbiotic business that makes a one-time profit from selling a device and then generates a steady revenue stream from that user.
As investors realize this, Apple's P/E will start to climb, and the Apple stock price along with it.
So let's say Apple's P/E rises 50% over the next two years as its services business gains traction. That gives AAPL a P/E of 21. And according to FactSet estimates, Apple's earnings per share in 2018 will be just over $10.
That puts the Apple stock price in 2018 at $210 - a 73% gain from the current price.
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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.