Apple Q3 Earnings Preview: Experts Say iPhone, Services Are Key

Apple Inc. AAPL shares have gained about 13.7 percent year-to-date; the stock gained roughly 49 percent in 2017. Even as the stock is pushing toward a $1-trillion valuation, concerns about the iPhone product cycle are weighing it down.  

The Cupertino, California company is set to release fiscal third quarter results at 5 p.m. Tuesday.

Q3 Expectations

• The consensus revenue expectation translates to roughly 15-percent year-over-year growth, but a 14-percent sequential drop.
• The EPS estimate represents 31-percent year-over-year growth, but a 20-percent quarter-over-quarter decline.

The June quarter is Apple's seasonally weak period before the September quarter, which encompasses the back-to-school season, and the December quarter, which includes the holiday shopping season. 

Shipments of iPhones are likely to grow 3 percent year-over-year to 41.3 million in Q3; the Services segment is likely to post 19-percent growth; and Apple is likely to return $25 billion in capital, Loup Ventures' Gene Munster said in a preview of Apple's Q3.

Q3 iPhone revenues are likely to exceed expectations, with higher ASPs providing a boost, according to GBH Insights' Daniel Ives, who was quoted by CNBC.

The ASP for iPhones is likely to increase $87 year-over-year to $728, according to The Street.

Munster Identifies New Paradigm For Apple Investors

A stable iPhone business, a growing Services segment, faster-than-expected capital return program and the introduction of new products are the new paradigm for Apple investors, Munster said. These developments are two to three years from becoming the consensus, he said.

Munster sees original video, AR wearables, personal health and autonomous vehicles as growth opportunities that are not yet reflected in Apple's share price. 

Services: The Linchpin Of Apple's Growth

The services segment is likely to be the linchpin of growth going forward, said GBH's Ives. If the services business is spun off into a separate company, it could be valued between $350 and $400 billion, he said.

In Q2, the Services segment contributed $9.19 billion in revenue, accounting for about 15 percent of the total revenue for the quarter.

The segment comprises includes revenue from Digital Content and Services, AppleCare, Apple Pay and licensing.

Looking Ahead

The Street's estimate for 1-percent iPhone unit growth for the September quarter does not reflect expectations for three iPhones this fall, namely an iPhone X refresh; a 25-percent larger model; and one lower-priced LCD model, said Loup Ventures' Munster. 

For 2019, Munster said the consensus expectations for flat iPhone shipments of about 220 million is conservative, and he estimates 3-percent growth. 

The Stock

Apple shares, which were trading in a broad range of $155-$181 in the calendar first quarter, moved above the range following the release of Q2 results, but have been rangebound since then.

Will Q3 report propel Apple's stock higher? Stay tuned. 

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Photo courtesy of Apple.