Apple Earnings: Analyst Expects Overall 'Solid' Quarter, But Longer-Term Concerns Remain

Shares of Apple Inc. AAPL were trading higher by nearly 0.50 percent on Tuesday morning — mere hours before the company's second-quarter earnings report would be released after the trading session.

Wells Fargo's Maynard Um maintains a Market-Perform rating on Apple's stock with a valuation range of $135 to $145. Um offered some thoughts on what to expect in the earnings report ahead of the release.

Solid Quarter

Based on the math behind an ongoing dispute with QUALCOMM, Inc. QCOM, the analyst is estimating Apple will report it has shipped roughly 51 million iPhone units in the quarter ($35.2 billion in sales at an average selling price of $665). Meanwhile, the Street is looking for Apple to report it shipped 52.2 million iPhone units, which implies some risk to the analyst's total $53.4 billion revenue estimate for the quarter.

Um is, however, expecting a "solid" gross margin rate of 39.1 percent versus the Street's 38.7 percent estimate.

High Expectations For Capital Allocation

Um noted that Apple has already boosted its share repurchase authorization program by $50 billion, $30 billion, $50 billion and $35 billion in each of the past four years. The company also hiked its dividend by $0.06, $0.03, $0.05 and $0.05 per share over the same period.

However, an increase to both allocation programs merely in-line with the past four years will be considered "disappointing" amid heightened expectations. The analyst suggested Apple could tap the debt market to finance further authorizations, although a "materially larger" return could be limited.

Bottom Line

Um also commented on the latest rounds of iPhone 8 rumors, which suggest the phone won't be released until next year. The analyst continues to "expect an on time launch."

Bottom line, the analyst's concerns surrounding off-cycle demand, the June quarter, the potential for a delay in the iPhone 8 and ongoing litigation woes all offset positive factors including tax reform and the eventual iPhone 8 supercycle.