Apple Q3 Preview: Analyst Expects Modest Beat, Downward Guide But Sees Improving Q4 App Store Trends

BofA Securities analyst Oleg Melentyev maintained a Neutral rating on Apple Inc AAPL with a price target of $210 ahead of its third-quarter earnings.

As per SensorTower, App Store revenues in 4Q23 (after 30 days) increased to $2.2 billion (+8% Y/Y, according to data on developer revenues from SensorTower), with total downloads (iPhone + iPad) rising 9.3% Y/Y. 

For July, App store revenue in China increased 3% Y/Y after rising 6% Y/Y. 

In 4Q23, the analyst saw app store dollars per download decline by 1.2% Y/Y. 

Overall, App Store trends improved Y/Y in July Globally and in the U.S. The positive catalysts of new product introduction (AR/VR headset) and stable iPhones are offset by a potentially weaker consumer spending environment in the second half of FY23, leading to the re-rating.

In 4Q23, the Gaming segment increased 4.4% Y/Y to $1.2 billion, accounting for 55% of total App store revenue vs. 57% a year ago. Games remained the largest segment, followed by Entertainment (12%), Photo & Video (5%), Social Networking (5%), and Music (3%). 

China gaming segment revenue increased 3% Y/Y in 4Q23, while China gaming downloads declined 4% Y/Y. 

In July, the Chinese gaming regulator approved 88 domestic games (vs. 89 in June), which can drive further improvement. 

Recently, Apple has pulled over 100 ChatGPT-related apps from the China iOS store. In July, Chinese regulators introduced new AI model regulation set to take effect on August 15. Apps with generative AI content for the public must pass an assessment from the Cyberspace Administration of China. 

The analyst modeled continued services revenue growth re-acceleration to 10% Y/Y for total services revenue growth starting 4Q23 (in line with app store recovery) attributed to both easier Y/Y compares (-3.5% global app store revenue in 4Q22) and continued new game approvals in China (around 500 so far in 2023). 

The analyst's investor conversations suggest that expectations are for a modest beat in the quarter and for AAPL to guide inline (flat Y/Y) to better (he expects a slightly weaker guide that is down Y/Y in total revenue for the September quarter). 

Price Action: AAPL shares traded lower by 0.32% at $191.97 on the last check Thursday.