The following commentary was originally sent to Action Alerts PLUS subscribers on Jan. 25, 2016.
One of the stock market's most talked-about names -- Apple (AAPL) -- is set to report its fiscal-first-quarter earnings Tuesday after the market close with a 5 p.m. ET conference call to follow. Remember, Apple's fiscal calendar ends in September and its first quarter runs from October through December.
Shares of Apple have been a hot topic for the last couple of months or so as concerns have mounted regarding the company's iPhone sales prospects following a reduction in estimates (for current and upcoming quarters) from what seems like every analyst on the Street. Subsequent announcements from some key Apple suppliers, who noted supply-chain cuts, also added to the suggested weakness for iPhone sales moving forward. Investors remain so focused on these estimate cuts as Apple is still viewed as a company driven solely by iPhone sales, despite its growing ecosystem.
That being said, while we recognize the validity of the near-term concerns, we have confidence that the company and its well-seasoned management team will weather the storm over the course of the year. In addition, we see several catalysts that will propel shares in the intermediate to long term. (Click here to read our response to iPhone estimate cuts and analysis of catalysts.)
For this quarter in particular, the Street is modeling $76.6 billion for revenue, which would be roughly a 2.7% gain year over year (Apple guided for $75.5 billion to $77.5 billion), and $3.23 per share for the bottom line (a 5%+ increase year over year). Of course, all eyes will be on the iPhone numbers, with some attention on the ancillary products. IPhone sales expectations are set at 75 million units with an average selling price (ASP) of $674. The Street is also expecting 17.3 million iPads sold and 5.8 million Mac units sold. Gross margins are expected to come in around 39.9%.
While these numbers will, of course, be important, we believe investors will be keying in on the company's 2Q guidance, where EPS is expected to come in around $2.24 and total revenue is modeled for around $55.7 billion, which would be roughly a 4% drop from last year's fiscal second quarter. Management's comments on the iPhone market outlook will be of utmost importance.
While the 2Q forecasts are nothing to rave about (as numbers have dropped drastically following the aforementioned iPhone estimate cuts), the 16%+ selloff in shares since the beginning of December has priced in these lower expectations. That being said, we believe there is more upside potential than normal to this earnings announcement as sentiment is at its lows (the stock trades at roughly 10x projected earnings, a steep discount to its own historical average, the S&P and the Nasdaq Composite).
We will, of course, be listening for an update on the iPhone outlook for the remainder of the year, but we will also be following for details on any new phone models being released, management's view on the broader smartphone market, and the company's performance and outlook in China (and any widespread read on the Chinese consumer). We will be back with our reaction following the company's announcement.