Apple Earnings Preview: A Pullback Would Be An Opportunity

Jul. 27, 2021 7:01 AM ETApple Inc. (AAPL)49 Comments

Summary

  • Apple is about to report fiscal Q3 earnings, and analysts expect to see impressive bottom line growth of over 55% this time.
  • Without a full set of guidance, it's hard to predict Apple's results. Even the tea leaves have been sending mixed signals.
  • Should Apple take a post-earnings hit, I believe that the pullback would be an opportunity for investors to buy this great stock on weakness.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Learn More »
Apple Store in China
Nikada/iStock Unreleased via Getty Images

The most valuable company in the world is about to report fiscal third quarter results. Riding a number of tailwinds that range from the 5G cycle to a pandemic-driven change in consumer habits, Apple (NASDAQ:AAPL) will have the challenge of impressing investors against (1) comps that start to get tough this quarter and (2) a stock that has rallied ahead of earnings season.

For reference, Wall Street expects revenues to land 23% above last year's levels – the second-highest top-line growth rate in the past five years at least, probably much longer. EPS of $1.01, if achieved, would represent a whopping 55%-plus increase YoY.

Source: Seeking Alpha

Mixed signals

This is probably the last quarter for which analysts will not have a full set of guidance from the management team. Last quarter, CFO Luca Maestri provided a fiscal Q3 outlook on several key metrics, from gross margin to tax rate and dividends. But regarding revenues, he summarized his projections as follows:

We expect our June quarter revenue to grow strong double digits year-over-year. However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years.

It's the uncertainty, driven primarily by (1) the odd timing of the iPhone 12 launch last year and (2) the supply chain constraints caused by the recovery from the COVID-19 crisis, that makes it hard to pin down the revenue and earnings number in fiscal Q3. Case in point, the range in analysts' revenue projections is very wide: From a low of $65.7 billion to a high of $77.5 billion (YoY growth of 10% to 30%).

Even the tea leaves don't seem to help much this time. On one hand, analysts have been revising their estimates higher in the past few weeks. Not only have the bulls been saying that a solid quarter is in the works, even the less enthusiastic analysts, like Credit Suisse's Matthew Cabral, seem to have set their expectations high.

But on the other hand, recent data on global shipments of smartphones, personal computers and devices sold in China paint a different picture:

  • While research firm Canalys estimates worldwide smartphone unit sales to have increased a healthy 12% in the most recent quarter, it believes that Apple was by far the worst performer of the top 5 vendors (see below).
  • Research firm IDC reports that personal computer shipments have risen 13% in calendar Q2, less than in the prior quarter – and that Apple performed relatively poorly, compared to its peers.
  • Seeking Alpha's Paulo Santos has recently explained how iPhone sales in China could disappoint, using data from CAICT.

Figure 2: Worldwide smartphone shipments Q2, 2021.

Source: Canalys

Traders and investors

To be fair, the results of the most recent period may not be the most important catalyst for Apple's share price on earnings day. I believe the focus of attention will be on (1) the narrative around the component shortage, and how it could impact the release of the next iPhone in the fall, and (2) whether the slow unwind of the pandemic and the tough comps ahead may lead to more modest fiscal Q4 guidance.

Regarding the thesis on AAPL, I believe that traders and investors are faced with a different set of questions to answer. Were I the former, I would probably be a bit concerned about the recent rally in share price. Historically (see chart below, using data from the past 20 quarters), Apple tends to rise about 1% in the two weeks leading to earnings day and nearly 5% in the two weeks after it. But in the past month alone, the stock has already climbed 11%, arguably front-loading any potential earnings-driven price appreciation.

Source: DM Martins Research, data from Yahoo Finance

However, I am much less concerned about day-to-day or week-to-week movements in the stock price. When it comes to Apple, I believe that the best strategy is to own it for the long term, eventually taking advantage of price dips to increase the size of the position.

My bullish stance on AAPL is based primarily on the following factors:

  • The iPhone will probably benefit from a multi-year upgrade cycle driven, in great part, by the LTE-to-5G transition.
  • Growth in services will help to make Apple's revenues more stable and predictable over time – although antitrust concerns, particularly those related to the App Store, should not be ignored.
  • Technology improvements (e.g. the M1 chip) should breathe life into two segments that I once left for dead: Mac and iPad.
  • Longer-term growth opportunities in mixed reality and autonomous vehicles are probably far from being fully priced into the stock.

In the end, I would not dare take guesses on how strong or soft Apple's fiscal Q3 might be. But should the bearish thesis be confirmed and the stock takes a post-earnings hit, I believe that the pullback would be an opportunity for investors to buy this great stock on weakness.

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This article was written by

DM Martins Research profile picture
20.44K Followers
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Disclosure: I/we have a beneficial long position in the shares of AAPL either through stock ownership, options, or other derivatives. 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.

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