Apple 3Q14 Preview: iPhone 6 To Steal The Show

| About: Apple Inc. (AAPL)


Apple to report earnings next week with consensus expecting 7% revenue growth and 14% EPS growth.

iPhone and iPad sale are likely to decelerate once again, indicating a maturing smartphone market and competitive risk.

All eyes will be on the confirmation of iPhone 6 launch.

Apple (NASDAQ:AAPL) will report FY3Q14 results on July 22nd with consensus expecting $1.22 EPS (+14% y/y) on $37.8b in revenue (+7% y/y). Last quarter, AAPL reported better than expected results due to strong iPhone and Macbook numbers, but I believe the key reason that drove the stock higher (+8%) was the announcement of a 7:1 stock split. For this upcoming quarter, iPhone and iPad shipments will be in focus. However, I suspect the attitude towards the results to be tepid as investors focus more on the guidance, in particular the scheduled release of iPhone 6.

Decelerating iPhone shipment

The anticipation of the iPhone 6 has been in the market for some time and I expect the near-term sentiment to cause consumers to hold back on their handset purchases. That said, ongoing deceleration of iPhone shipment is expected in this quarter.

Competition is also a culprit of the decelerating iPhone shipment. In my view, the iPhone is facing industry maturity and slower replacement cycle in the high-end space while getting squeezed from the mid-end space as the emerging market OEMs, such as Xiaomi, OPPO, Karbonn and Micromax move up the value chain. This places AAPL in a tough spot in that it is facing a macro headwind on one side and competitive headwind on the other. Please see my initiation on Apple: The Party Is Over.

iPad losing market share

Like the iPhone, iPad shipments could be under pressure due to competition from the cheaper Android tablets. It is worth noting that AAPL's global tablet market share has declined from 52% in 2011 to 34% by the end of 2013. The trend is unlikely to reverse in the near-term as an increasing number of Android alternatives roll out into the market, thereby negatively impacting the iOS ecosystem while enlarging the Android ecosystem.

In my view, AAPL's iOS ecosystem is contracting in all geographies and one way to maintain its near-term growth profile is to ramp up on its content revenue (ie. games, apps, movies and songs) to generate higher revenue per user. However, last quarter's content sale decelerated (+11% y/y) faster than expected and it remains to be seen on whether content distribution can become a meaningful revenue driver for AAPL in the future.

iPhone 6 launch

All eyes will be on the additional information regarding the iPhone 6 launch. The consensus is mixed on whether the larger 5.5-inch iPhone could be launched on time due to reports suggesting that Apple is facing technical difficulties with the larger screen. The larger screen iPhone is important because the successful launch of the product allows AAPL to be competitive against its Android peers that have already migrated to the >5-inch display. If AAPL can only deliver the 4.7-inch model, expect the stock to sell-off. On the flip side, the stock could rally if management confirms that both models are expected to launch at the same time.

I remain cautious going into earnings as I see operating and competitive risks outweigh the upside.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.