For Apple Q2 Earnings, Ignore the Noise and Focus on This

It's the week of Apple Q2 earnings, and the financial media are in a panic.


Over the past few weeks, dozens of stories speculating on poor iPhone sales have stoked anxiety over Apple Inc.'s (Nasdaq: AAPL) Q2 earnings, due after the market closes today (Tuesday).

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However, analysts actually expect Apple to do well.

According to Thompson Reuters, revenue is projected to come in at $60.84 billion, a 13% increase over the same quarter a year ago. The forecast for earnings is $2.68 per share, a 24% year-over-year increase.

The forecast for iPhone sales is 53 million, a 4.4% increase over last year.

[Post-earnings update: Apple beat expectations with an EPS of $2.73 and hit the revenue  target with $61.1 billion. CEO Tim Cook said the iPhone X outsold all other versions of iPhone in the quarter. Total iPhone sales slightly missed on units (52.2 million vs. 53 million) and revenue ($38 billion vs. $39.1 billion) but unit sales were up 3% year-over-year and revenue 14% year-over-year.

 Revenue from China was up 21% year-over-year.Guidance for Q3 was slightly above expectations (revenue of $51.5 billion to $53.5 billion vs. forecast for $51.61 billion.) Looks like the "experts" were sowing fear needlessly again!]

But the mood in the financial media is dark.

We've seen this happen many times before. Rumors of trouble in Apple's iPhone supply chain get interpreted as a looming drop in sales, causing the Apple stock price to fall accordingly.

The problem is, Apple's reported numbers rarely reflect these concerns. Investors panic sell their Apple shares based on these misleading reports.

And beyond that, even when Apple does stumble, it's rarely as bad as it's made out to be. Over the years, AAPL stock has recovered from every one of these events to make new highs.

Let's walk through what's been going on lately - and why investors should ignore it...

Don't Sell AAPL Stock Based on This "News"

Because Apple is notoriously secretive, it's harder for analysts to get the information they need to do their jobs. They end up inferring much from what information they can get from Apple's supply chain.

The trouble is, they usually don't get the full picture.

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In recent weeks, reports have focused on slowdowns for the Apple supply chain and signs of weaker sales in China.

An April 23 Bloomberg story noted cutbacks at the manufacturing plants that assemble most of Apple's devices.

"The concern is that the iPhone X, while enjoying a customary holiday quarter spike for new-generation Apple gadgets, fizzled out rapidly," Bloomberg said.

A report by Longbow Research the week before said several Apple suppliers, such as Cirrus Logic Inc. (Nasdaq: CRUS) and Jabil Inc. (NYSE: JBL), got fewer orders in Q1 than they expected.

Morgan Stanley (NYSE: MS) cut its Apple stock target from $203 to $200 on April 20, citing "weak supply chain data points and continued weakness in China data."

Mirabaud Securities went so far as to claim the iPhone X is "dead," suggesting Apple is planning to pull the plug on the innovative device and backtrack to the iPhone 8 design.

The constant barrage of these negative stories depresses sentiment on Apple stock and takes the price with it. Since hitting $181.72 on March 12, AAPL sunk as low as $162.32 (April 27), a decline of 10.67%.

Selling on this kind of news is almost always a mistake...

Lessons from Apple Stock History

Back in January 2017, there was a similar wave of negative stories and analyst anxiety. I advised investors to hold on to their Apple shares, which were trading at $116 at the time, predicting a 20% gain to $140 by 2018.

I was wrong. At today's price of $168, Apple stock is up 45% from the day I wrote that story.

It happened in May 2016, too, with similar concerns about iPhone sales and weakness in China. I predicted AAPL would rise from $95 to the $130 to $135 range. I was wrong again. Apple was trading north of $150 one year later.

You get the point.

Back in 2013 (I told you this has been going on for a long time), Apple CEO Tim Cook explained why it's a bad idea to give too much weight to dire warnings about Apple sales and glitches in its supply chain.

"Even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business, because the supply chain is very complex, and we obviously have multiple sources for things," Cook said in an earnings conference call. "Yields might vary, supplier performance can vary, the beginning inventory positions can vary, I mean there's just an inordinately long list of things that would make any single data point not a great proxy for what's going on."

These stories often leave out mitigating factors and other aspects of Apple's business that make a positive long-term case for the stock.

And it starts with what Apple's earnings - not just those of the current quarter, but the long-term trends - tell us about what's really going on at the company...

This Apple Earnings Trend Makes AAPL an Obvious Buy

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Instead of focusing on Apple's Q2 numbers and whether they beat or miss analyst expectations, investors need to step back.

If you're a long-term investor, what matters isn't the exact number of iPhones Apple sold (or didn't sell), but whether the company will continue to grow profits.

And the answer to that is yes. Now, Apple can't double its earnings the way it could in the early years of the iPhone. But it has substantially increased profits over the past few years and should do so for at least the next three years.

As recently as 2014, Apple's annual earnings per share (EPS) was $6.45. Last year (fiscal 2017), Apple reported an EPS of $9.21 - an increase of 43% in three years.

According to FactSet, Apple will earn $11.37 in fiscal 2018 (which ends in September), $12.84 in fiscal 2019, and $13.90 in 2020. That last figure represents a 51% gain from the 2017 EPS.

How can this be?

Let's Throw Some Positive Apple Rumors into the Mix

Not all the rumors are negative, and some of the positive ones make sense. It's probably true that the high price of the iPhone X has constrained sales, but some rumors suggest a price drop is coming this September.

According to DigiTimes, Apple will offer an iPhone X with a less expensive LED screen. A 10% lower manufacturing bill will give Apple more pricing leeway.

Instead of starting at $999, the new iPhone X models will likely start at $899, or possibly $749.

On the other end of the product line, Apple is thought to be working on a new iPhone SE. This model is expected to add some of the fancy features of the iPhone X, such as face recognition, but at a cost ranging from $550 to $650. Apple will preserve margins by using less robust chips on the inside.

Apart from the iPhone, Apple's services business continues to grow rapidly. Annual revenue from services has increased from $18 billion in 2014 to an expected $35 billion this year. By 2021, services revenue is forecast to be $50 billion.

And then there's the Apple "skunkworks" factor. The company is always working on new projects, one of which could become Apple's next blockbuster in the next several years. (Right now, my money is on some kind of virtual reality/augmented reality device.)

Just using the FactSet figures, Apple stock could rise as much as 40% over the next two years, to $236 per share. On top of that, Apple pays a dividend of $2.52, for a yield of 1.52%.

To sweeten the pot a bit more, Apple is expected to bring home its $160 billion in overseas cash over the next few years, with much of it going to shareholders in the form of share buybacks and dividend hikes.

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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.

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