Apple (AAPL - Free Report) releases earning today after market close and expectations are low. AAPL’s EPS estimates for Q1 are $2.37 per share representing a 13.19% year over year decrease in earnings, and estimated revenues of $57.54 billion would be a 5.88% drop from Q1 last year. Earnings estimates have dropped considerably over the past 90 days on expected weak smartphone sales . AAPL is down 2.3% this morning going into earnings.
Apple EPS estimates have been historically conservative. Over the past 23 quarterly earnings (almost 6 years) Apple has had earnings beats for every quarter except one. The average earnings surprise for AAPL since its inception is +3.47%. So investors may already be expecting a beat.
With improvements to smartphones becoming increasingly marginal, consumers don’t see a reason to update to the latest handsets. Smartphone sales as a category were down over 4% in 2018 with iPhone sales being down 15% year over year for the December quarter (Apple’s fiscal Q1 2019). Apple’s falling revenue is still made up of over 60% iPhone sales, down from almost 70% last year.
Apple was able to offset some of this loss with revenue improvements in every other segment, notable a 33% increase in wearables, home & accessories which includes the infamous Air Pods that everyone seems to need and Apple Watch which has gained traction in the athletic community for people who want to monitor their exercise and control their iPhone from their wrist. The iPad also saw a 17% improvement from the same quarter last year, this was due to the new iPad Pro that college students are flocking to for efficient note taking and information logging.
Even with negative growth in Apple’s fiscal Q1 revenue AAPL is still able to outperform the market. Year to date AAPL is up 26.6% almost 10% above the gains that the S&P 500 was able to achieve. Below AAPL (blue) vs. S&P 500 (red) YTD performance.
5G the Future of Smartphones
5G could be the saving grace of the declining smartphone industry. It’s going to mark a new generation of phones that all consumers will eventually transition to. Apple needs to be at the forefront of this next generation smartphone as they have been in past technology shifts.
5G technology has been discussed in tech blogs and articles for a year or so now, but what really is 5G and how does it differ from 4G LTE? 5G will give users faster upload & download speeds, lower latency, meaning more responsive devices and the ability to connect many more devices.
Verizon has been the first company to "flip the switch" on its 5G network at the start of this month. This network is active in parts of Chicago and Minneapolis. Unfortunately for Apple, the first phones that will be compatible with this 5G network are going to be android devices, the Moto Z3 (MSI - Free Report) (5G compatible with a mod) and the Galaxy S10 5G, which is expected in May.
It will still be a number of years till 5G is universally used. It will be a slow transition with new cell networks taking time to set up. Apple isn’t too late to join the party. Apple just resolved a crucial royalty discrepancy with Qualcomm (QCOM - Free Report) giving them access to the worlds first commercially viable 5G platform for smartphones, Snapdragon 855 Mobile Platform.
In AAPL’s earnings report this afternoon look for bounce back growth in iPhone sales as well as improvement in overseas operation primarily China which saw an over 25% drop year over year in the December quarter.
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