The market is taking some steam out of Apple Inc. (AAPL) rapid run so far in 2019 as it anticipates earnings post-market.
Shares fell just over 2% in mid-day trading, tempering the over 40% run the stock has made after its pre-forecast on January 3 tanked shares 10% to kick off the year.
The pessimism ahead of the print comes as Wall Street has tempered estimates for declining sales and earnings per share, which sets the expectation for the first consecutive quarterly decline in earnings and revenue at Apple in nearly three years.
The consensus EPS Estimate stands at $2.36, down nearly 14% year over year, while expectations for revenue also indicate an over 6% decline year over year to $57.4 billion. The recession in results comes at an inopportune time, as the stock's rapid run in 2019 has consistently tested technical indicators in recent weeks.
Aside from the test of technical indicators the surge in Apple stock inevitably wrought, much of the skepticism emanates from an expected slowdown in hardware sales, the segment that still constitutes the majority of the tech giant's sales.
The iPhone cycle has become a bit long in the tooth, with Apple not expected to roll out a new phone until later in the year. As such, it might be difficult to muster strong enough results and guidance for the coming quarter to motivate buyers at the stock's recently elevated level.
Based on the late-cycle factors and the potentially postponed release of 5G phones, despite a settlement with Qualcomm Inc. (QCOM) , Lynx Equity Strategies lowered its 2019 iPhone sales estimate from $143.5 billion on 188 million units sold to $129 billion on 173 million units sold.
In another lingering issue, iPhone sales in China will likely be a pain point.
The company was stung into the back half of 2019 by sales in China particularly, which may be a more complex issue to solve for the Tim Cook-led company.
"In our opinion Apple continues to face a "code red" situation in China and the right pricing strategy around XR and future versions will be key to putting a ring fence around the core installed base in the region," Wedbush analyst Dan Ives said. "With lower priced competition from all directions with Huawei/Xiaomi XIACF front and center, Apple needs to make sure they do not lose any current iPhone customers and thus speaks to the more significant price reductions on the way in the region over the coming months ahead of the next major product cycle in September."
That of course erodes the thesis many carried into last year, namely that higher ASPs would lead to higher margins, not slowed sales.
That is amplified by the macro factors that should curb expectations in the key region that represents nearly one fifth of Apple's geographical revenue. These go beyond the lingering trade tensions as well, which could well be alleviated in coming weeks.
"We view Greater China as a critical swing factor, following the 27% year over year revenue decline for consolidated Apple in the region in the calendar fourth quarter of 2018," Credit Suisse analyst Matthew Cabral said. "While we expect pressure from near-term cyclical factors (i.e., macro and trade tensions) to fade, we see underlying structural challenges that will likely take time to solve. We believe Apple's Greater China business slowed both due to a wider decline in the Chinese smartphone market and aggressive local competition, which has led to sustained iPhone market share loss after peaking in 2015."
He added that he does not expect meaningful improvement until 2020 as 5G phones are rolled out.
The key for Apple, as it has been for a number of quarters, is shifting the conversation to services revenue.
"While we acknowledge that near-to-midterm performance remains heavily influenced by iPhone sales, we believe longer-term upside will come as services revenue grows its share of overall sales," Jim Cramer's Action Alerts PLUS team explained. "Services provide for a recurring revenue stream at higher margins, a factor that serves to reduce earnings volatility while allowing for a higher percentage of sales to fall to the bottom line. As a result, we believe that services growth and the installed base are much more important than how many devices the company can sell in a given 90-day period."
Services are certainly under the microscope for CEO Tim Cook, who has touted healthcare as his top targeted industry.
"[We are] expecting healthy services revenue growth on the path to installed base monetization," Credit Suisse's Cabral commented. "Against a backdrop of a maturing iPhone business, Apple is pivoting away from its hardware-centric past to a strategy centered on monetizing its massive installed base of 900mn iPhones and 1.4 billion total devices through services."
A progression in this pivot will be key to the stock implication on Tuesday evening.
The issue appears to be that the inflection point for the stock on this thesis is not yet expected.