Woman holding two of the culprits
I am going to explain a simple thesis here. Apple (NASDAQ:AAPL) is likely to guide Q3 FY2017 revenue growth lower when it reports Q2 FY2017 on May 2.
Why is this so? Let's go over the motives.
Here are the current revenue growth consensus expectations Apple is facing:
Source: Yahoo Finance
- Q2 FY2017, which Apple is about to report, stands at +4.7% year-on-year.
- Q3 FY2017, which Apple will guide on, stands at +7.6% year-on-year, which is meaningful acceleration.
First Reason Why Guidance Should Be Lower
The first reason is because of the iPhone SE. The iPhone SE was unveiled on March 21, 2016. It started shipping on March 31, 2016. However, as per Apple, none of the iPhone SE's revenues made it into Q2 FY2016.
As a result, the 4.7% growth year-on-year that's expected for Q2 FY2017 compares to a base quarter where Apple was shipping the rather obsolete iPhone 5s. Q3 FY2017, however, will compare to a quarter where Apple was shipping the new, just-launched, impressively-spec'd, iPhone SE.
As a result, growth comparisons in Q3 FY2017 become much harder than they were in Q2 FY2017. Yet, as we just saw, the consensus calls for growth acceleration. This makes it likely that the consensus is too optimistic and Apple will guide below present expectations.
Second Reason Why Guidance Should be Lower
Here, we'll be using something of an imperfect proxy. In part, it will reflect the previous motive as well.
Apple mostly manufactures its phones by subcontracting Foxconn for the job. Thus, Foxconn's revenues tend to seasonally track Apple's demands, and anticipate slightly the upcoming new product introductions and ongoing demand.
During 2016, as Apple was suffering with the iPhone 6s clearly underperforming the iPhone 6, Foxconn mostly saw year-on-year drops in revenue:
Source: Foxconn; Monthly revenues; 2016
We can clearly see the ongoing revenue drops associated with the iPhone 6s/6 comparisons. We also can see when it geared up for the iPhone 7 release. Finally, in February/March we can see the effect from gearing up for the iPhone SE. Now for 2017:
Here, we see slight ongoing growth, not incompatible with the growth also expected of Apple for Q2 FY2017. However, come March 2017, nearly all year-on-year growth is gone. This is a month which, due to a slight lag, will thus already be factored into Apple's Q3 FY2017.
As a result, while growth acceleration is expected of Apple for Q3 FY2017, this evidence from Foxconn actually argues for the contrary: revenue growth deceleration. Giving Apple the benefit of the doubt still leaves growth stagnation as a likely outcome. Such would imply Apple guiding down on revenue growth for Q3 FY2017, though.
There are two counterpoints to be made here:
- Apple introduced new MacBook Pros in October and November 2016. Thus, Q2 and Q3 FY2017 will compare with base quarters which don't include the new models. This favors reported growth for both quarters. However, early quarters usually benefit the most, so such could help absolute growth in both quarters, but it would also ask for lower growth in Q3 than Q2. Overall Mac sales are not growing extraordinarily (+4.5% year-on-year in Q1 2017), though, so this shouldn't be a large factor.
- Apple introduced the new Fourth Generation iPad in March, so its sales will essentially fall in Q3 FY2017. This new iPad is significantly cheaper than previous iPads, at a starting price of just $329, versus $499 for past iPads. This iPad is thus favorable for Q3 FY2017 reported revenue growth. However, the iPhone represents a ~140 million units/year market, out of which the iPhone SE should have represented ~10% over a year. The iPad sold just 20.6 million units over FY2016, and the new iPad is likely to cannibalize part of the (more expensive) units while likely not growing the total "much" (in terms of units, with "much" meaning not much more than several added millions of units). The result is that the iPhone SE is likely more relevant.
In light of what's exposed, and especially due to the iPhone SE entering the comparison base in Q3 FY2017, I find it likely that Apple will guide revenue growth lower than market expectations when it reports earnings on May 2.
This doesn't mean Apple stock will necessarily react negatively when it reports earnings, since this gives us no insight on whether Apple will beat Q2 FY2017 earnings or not. Also, Apple is known to sandbag, and this might be seen as one of those times (though it isn't). Finally, Apple is trading mostly on the iPhone 8 and can thus ignore both EPS reports and guidance.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.