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Apple Inc. Earnings Preview: iPhone 7 Sales Mystery Will Finally Be Solved

Thursday, October 20, 2016 9:49
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Apple logoFrom Zacks Research: Apple, Inc. (NASDAQ:AAPL) is set to report fourth-quarter fiscal 2016 results on Oct 25. Last quarter, it posted a 2.16% positive earnings surprise.

The company has outperformed the Zacks Consensus Estimate in three of the last four quarters with an average positive earnings surprise of 1.03%. Let’s see how things are shaping up prior to the announcement.

Why a Likely Positive Surprise?

Our proven model shows that Apple is likely to beat earnings estimates this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Apple has the right combination of the two key components.

Zacks ESP: The company has an Earnings ESP of +1.21%. This is because the Most Accurate estimate stands at $1.67 while the Zacks Consensus Estimate is pegged lower at $1.65.

Zacks Rank: Apple carries a Zacks Rank #2, which when combined with a positive ESP make us reasonably confident of an earnings beat.

Conversely, the Sell-rated stocks (Rank #4 and 5) should never be considered going into an earnings announcement.

APPLE INC Price, Consensus and EPS Surprise

APPLE INC Price, Consensus and EPS Surprise | APPLE INC Quote

What is Driving the Better-than-Expected Earnings?

Since the beginning of this year, Apple has been on a rollercoaster ride given muted demand and sluggish macroeconomic conditions especially in China. Despite this, in the last reported quarter, the company managed to beat expectations on both counts.

We expect the company’s top line in the to-be-reported quarter to be driven by recovering iPhone sales and robust upgrade cycles. Historically, the fourth quarter has been a strong one for Apple as the company launches its most important offerings during this time. This September, Apple launched the new iPhones (iPhone 7 and 7 Plus), which appear to be significantly better than their predecessors. The company also unveiled a newer version of Apple Watch in addition to providing updates on Apple Music, App Store and Apple Watch in addition to the software upgrades.

Apple remains optimistic about growth in regions like India and a decent rebound in China. It has been taking initiatives like setting up R&D facilities to strengthen its foothold in China. A loyal customer base, a strong ecosystem and a robust installed base are the other positives.  Apple’s Services business is also expected to remain strong as it is mostly dependent on the already installed Apple devices. The company has also been seeing strength in the number of switchers from Android and other operating systems to iOS.

Apart from this, other revenue drivers to watch out for ahead of this quarter’s results include sales from iPad, the App Store as well as Apple’s other products division. Further, its collaborations with IBM, SAP, Deloitte and Cisco (CSCOAnalyst Report) in the enterprise space are likely to be accretive to the fourth quarter and beyond.

However, continued macroeconomic headwinds in some key regions amid increasing competition may pose some challenges.

Apple shares fell $0.05 (-0.04%) to $117.07 in Thursday afternoon trading. Year-to-date, APPL has gained 11.24%, more than doubling the return of the benchmark S&P 500 in the same period.

This article is brought to you courtesy of Zacks Research.

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