By Shaun Murison*
Apple has emerged as one of the most widely recognised brands in the world with a loyal consumer following of its premium electronic offering. It is now the largest globally listed company in terms of market capitalization and is scheduled to release 3Q2014 earnings on Tuesday 22 July.
Historically, 3rd quarter revenues for Apple have been relatively subdued in lieu of the 4th quarter releases of new product models such as that of the iPhone. Consumers generally tend to wait for these newer products and in turn, meaningful revenue and sales gains have been realized previously in the 1st and 4thquarter rather than the third. In the last results release, the company guided that it expects 3rd quarter revenue to be between $36bn and $38bn with a gross margin of between 37% and 38%.
This would equate to a revenue decline from 2Q2014 of between 12.8% and 17.4%, with gross margin diminished by around 1.3% to 2.3%. The forecast would also equate to a marginal 1.9% to 4.8% revenue gain from 2013’s 3rd quarter comparative, with gross margins more or less unchanged. A mean of analysts’ estimates expect revenue to be, towards the upper end of Apple’s guided range, at $37.9bn, with the company’s earnings expected to be in the vicinity of $1.23 per share.
The iPad is considered to have a longer time horizon in terms of replacement cycle and carries less availability in subsidized contractual support. iPod sales are in a declining sales trend while Mac computers hold a perennial consistency in its sales. For a beat on consensus earnings estimates for the quarter, iPhone sales finds the most relevance as it accounts for more than 50% of the company’s revenue. Having its products rolled out in China and Japan through the respective countries’ largest carriers could provide the meaningful impact to sales, a luxury not available in last year’s comparative. China mobile, the world’s largest wireless carrier, launched its iPhone offering late January this year. The mobile company has more than 750m customers and it will be interesting to see whether the first full quarter of the iPhone product offering has started to gain traction.
Although a softer quarter may be realized, in line with the historical seasonal trend, the full year outlook is likely to be bolstered by the launch of updated products (as it has in the past) such as the highly anticipated iPhone 6 and new iPad. A fresh new product line launch, such as that of the rumoured “iWatch” could have a meaningfully positive impact on earnings should it occur. Although the iWatch has not been confirmed by Apple as of yet, speculation thereof finds support in the company’s hire of watchmaker, Tag Heur’s Patrick Pruniaux, as well as a few new employees who have worked on Nike’s wrist worn activity tracker and fitness monitor, the Fuelband. With the success of the still market dominant iPad tablet, and iPhones cannibalization of a former breadwinner for the company, the iPod, one would think the addition of a new revenue stream via product diversity is nearing.  Perhaps the recent announcement that Apple is acquiring Beats Music and Beats Electronics for around $3bn could witness a new integration or a reboot of a product such as the iPod. Apple CEO, Tim Cook when referring to the acquisition has said “we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world”.
Apple remains an investor favourite and in the last few months we have seen investment upgrades (to overweight) from the likes of Morgan Stanley, Barclays and Citigroup. A Thomsons Reuters poll of 53 analysts shows an average rating of buy for the share, with only one of the analysts recommending a sell.
After a more than 30% share price gain since mid-April 2014, Apple finds itself in overbought territory. The price is currently testing support at 94.30, a break of which would favour short term downside, with the next level of support anticipated at 89.65. The long term trend remains firmly up, as gauged by the price trading above the 200 day simple moving average (blue line). With this in mind, short term weakness could afford trend followers opportunity to accumulate rather than trade against the underlying long term uptrend.
* Shaun Murison, an analyst at IG, has worked in financial markets for over eight years, and until recently ran IG’s Durban branch in South Africa, before moving to Johannesburg.
