Apple’s iPhone Sales Aren’t the Only Story: Margins Could Drive Stock Performance

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Apple Inc.’s upcoming earnings report might see a less-talked-about factor driving the stock’s performance: margins. JPMorgan analyst Samik Chatterjee believes that margins could be a significant swing factor for Apple’s AAPL stock.

Chatterjee points out that the “premiumization” of the iPhone, along with cost management, is positively impacting hardware margins. Additionally, the shift towards services is expected to further improve margins. The company had recently outlined a gross margin guidance of 45%-46% for its completed fiscal first quarter, and Chatterjee suggests that this guidance could be exceeded.

Furthermore, Chatterjee highlights the potential for “volume leverage” in the December quarter based on third-party data indicating strong iPhone sales. As a result, the focus on margins becomes even more crucial since they can influence earnings revisions and impact Apple’s stock valuation.

What to Expect in Apple’s December-Quarter Report

Earnings: Analysts tracked by FactSet anticipate Apple to report earnings per share of $2.10, representing an increase from the $1.88 figure reported last year.

Revenue: The FactSet consensus calls for a revenue of $118.0 billion, up from $117.2 billion in the previous year.

On a segment basis, analysts are predicting the following:

  • iPhone revenue of $67.6 billion, compared to $65.8 billion the previous year.
  • iPad revenue of $7.4 billion, down from $9.4 billion in the prior year.
  • Mac revenue of $7.9 billion, an increase from $7.7 billion last year.
  • Wearables, home, and accessories revenue of $11.3 billion, a decrease from $13.5 billion a year ago.
  • Services revenue of $23.3 billion, up from $20.8 billion in the previous year.

Stock Movement

Apple shares have experienced recent drops in response to the company’s earnings reports, although there have been gains following previous reports. Over a 12-month period, the stock has increased by 28%, outperforming the 18% increase of the S&P 500.

Analyst Perspectives

Analysts will be closely monitoring any commentary on the Vision Pro headset, which will officially be available on Friday and did not impact the most recent quarter.

Oppenheimer’s Martin Yang expects management to provide positive feedback on the initial sales, customer response, and developer feedback of the product, although he believes the device will contribute less than 1% to the company’s revenue in the March quarter.

In general, analysts have a “cautious” sentiment going into the report, expressing concerns over Apple potentially experiencing a year-over-year revenue decline in the March quarter due to weakness in Mac and negative data points regarding iPhone’s market share.

Apple is anticipated to break its four-quarter streak of year-over-year revenue drops with its December-quarter results.

Another area of focus will be China, where analysts express uncertainty.

CFRA analyst Angelo Zino highlights greater competitive pressures, such as the potential revitalization of Huawei, and the implications of geopolitical uncertainties. These uncertainties include potential bans on product usage in certain work environments or the ban of certain products/services over time, which pose risks to Apple.

Zino expects a mid-single-digit drop in revenue for the December quarter due to competitive pressures and promotions.

While Zino anticipates that Apple will exceed the consensus view with its overall results and guidance, he also acknowledges the possibility of management adopting a “conservative” approach in their guidance.

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