Upcoming Earnings: iPhone Sales In Focus When Apple Reports

Apple Inc AAPL reports first-quarter earnings for fiscal 2018 after the closing bell on Thursday, Feb. 1.  Over the past few weeks, the stock has been a bit more volatile amid a couple of analyst downgrades and reports that AAPL is cutting production targets for the iPhone X.

Regarding the downgrades, a couple of analysts moved the stock from buy to hold, citing lower sales estimates when the company reports Q2 fiscal 2018 earnings in a few months. Overall, Wall Street analysts are now expecting $60 billion in revenue, down from previous estimates for $67 billion. Regarding the production cuts, both the Nikkei Asian Review and the Wall Street Journal recently reported that AAPL is slashing its iPhone X production target in half in the first calendar quarter of 2018.

This is far from the first time that reports of production concerns have come out about the iPhone X since its November launch.  And considering that many analysts were optimistic that the new iPhone would spur a super cycle where users upgrade to the newest model and new users decide to purchase the latest model, there’s been a lot more emphasis on this quarter’s results and management’s guidance for its next quarterly report.

For the first quarter of fiscal 2018, AAPL is expected to report adjusted earnings per share (EPS) of $3.82, up from $3.36 compared to last year, on revenue of $86.29 billion, a 10.1% year-over-year increase, according to third-party consensus analyst estimates. Management previously issued guidance for revenue between $84 billion and $87 billion for this quarter.

Beyond the iPhones and management’s guidance, analysts have indicated the Services segment, which includes the App Store and Apple Music, will be another primary focus. When it last reported, revenue from Services increased 34% year-over-year to $8.5 billion. A few quarters back, management said their goal by 2020 was to double the $24 billion in revenue that segment generated in fiscal 2016. In fiscal 2017, Services revenue came in at $30 billion.

The company’s cash balance has been another consistent focus among analysts, a topic that is likely to come up again on this quarter’s call. When AAPL last reported results, CFO Luca Maestri said the company had $268.9 billion in cash and marketable securities, with $252.3 billion of that held outside the U.S. After the recent passage of tax reform, AAPL announced it expects to pay $38 billion in repatriation tax payments.

There have been mixed opinions among analysts regarding the impact of tax breaks. While they agree that the company would be a beneficiary, there is uncertainty over how much of that is already priced into the stock. 

APPLE SINCE START OF Q1 FISCAL 2018. Apple has been trading in a tighter range since the company last reported quarterly results at the beginning of November. Shares have pulled back a bit after hitting an all-time high of $180.01 on Jan. 18. The bottom chart shows the stock’s implied volatility. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Apple Options Trading Activity

Options traders have priced in about a 4% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility has been climbing in advance of the report and was at the 97^th percentile as of this morning.

In short-term trading at the Feb. 2 weekly expiration, calls have been active at the 170 and 175 strike prices. Trading has been lighter on the put side and concentrated at the 165 strike, pretty much right at the money.

Further out at the Feb. 16 monthly expiration, calls have been active at the 170 strike price in recent trading and open interest is highest at the 175 and 180 strikes. The 155-strike put, a decent ways out of the money, has been more active in recent trading; other than that, there’s been a smattering of activity across strikes ranging from 157.5 to 170. 

Looking Ahead

The jam-packed week of earnings continues with Google-parent Alphabet Inc GOOGL GOOG and Amazon.com, Inc. AMZN also reporting after the bell tomorrow. Before market open on Friday, Feb. 2, energy giants Exxon Mobil Corporation XOM and Chevron Corporation CVX release their quarterly results. January’s unemployment rate and non-farm payrolls also come out the same morning as XOM and CVX.

Next week, things calm down a little bit, but there are still a lot of companies left to report. General Motors Company GM, Chipotle Mexican Grill, Inc. CMG, Walt Disney Co (NYSEDIS), Tesla Inc TSLA and Twitter Inc TWTR are just some of the names on the docket. To get a rundown on what else is happening across markets, make sure to check out today’s Market Update.

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