On Tuesday, U.S. stocks fell sharply, while tech giants were sold off, with Tesla down more than 12 percent; Google down 3 percent and more than 3 percent after hours; Amazon down more than 4 percent and Apple down nearly 4 percent.
Although Microsoft surged nearly 5 percent after hours, it's not common for tech giants to beat the market sharply, and investors are pinning their hopes on Apple's earnings report. This can be extremely important for market confidence.
Analysts generally expect strong demand for Apple's products and services could help it exceed expectations. As a result, market expectations are high, but whether the outlook for the second quarter can remain solid is full of more variables.
Despite a severe sell-off in tech stocks this year, Apple has held its ground, with the iPhone maker's stock price down just 10 percent in 2022, compared with a 25 percent drop in the Nasdaq 100.
Strong demand for iPhones
In January, when Apple released its fourth-quarter results, the company decided not to issue formal performance guidance, citing "uncertainty in global markets in the near future." However, Apple's CFO did point out that "despite severe supply constraints, Apple is still likely to achieve strong year-over-year revenue growth and set a revenue record in the first quarter." ”
Apple's CFO also said that supply chain restrictions in the first quarter may be lower than in the fourth quarter of last year. Because of this, Wall Street expects Apple's first-quarter revenue to reach $94 billion, up 5 percent from a record $89.6 billion in the year-ago quarter.
At first glance, year-on-year growth can be a bit slow. However, investors should not forget that the iPhone 12 went on sale in the evening of December 2020, meaning that demand for the device has continued into March 2021. In contrast, the iPhone 13 model began selling in the third quarter of 2021, so the data may be a little lower year-on-year.
However, demand for Apple products remained strong last quarter. Even analysts expect Apple's first-quarter revenue estimate to be capped at $100.4 billion, which means the company will achieve double-digit year-over-year growth.
The average selling price is expected to continue to rise
It's no surprise that Apple reached the ceiling expected on Wall Street.
Morgan Stanley analyst Katy Huberty expects iPhone shipments to increase 10% year-over-year in the second quarter, driven by strong demand for the iPhone 13 series. The company shipped an estimated 60 million iPhones in the fourth quarter of last year, which means that this time shipments could be around 66 million units.
Huberty also raised his iPhone average selling price (ASP) forecast to $878 from $848. The growth of Apple's iPhone ASP can be attributed to a more favorable sales mix.
Huberty said the iPhone 13 accounted for 69 percent of Apple's smartphone sales last quarter, with another 16 percent coming from the iPhone 12 series. As a result, 5G devices are estimated to account for 85% of Apple's iPhone sales last quarter. In the era of 5G smartphones, Apple is enjoying impressive pricing power, so this should have a positive impact on its revenue and profits.
Huberty estimates that assuming 66 million iPhone shipments, iPhone revenue would reach $58 billion in the second quarter, up nearly 21 percent from $47.9 billion in the year-ago quarter. Since the iPhone is Apple's largest source of revenue, with 58% of its revenue coming from the iPhone in the first quarter of fiscal 2022, the steady performance of this product line may help Apple achieve better-than-expected performance.
Analysts expect Apple to earn $1.43 per share in the first quarter, up slightly from $1.40 per share in the year-ago quarter. However, increased sales and improved pricing should have a positive impact on Apple's profits and help it report stronger results.
There are more reasons to look long
In addition to the iPhone, Apple's Mac and Services business is also expected to help the company grow.
Mac shipments were estimated at 7.2 million units last quarter, up from 6 million expected by analysts. As a result, Huberty believes that Apple's revenue from Mac computers in fiscal second quarter could reach $9.5 billion, compared to $9.1 billion in the same period last year.
Meanwhile, revenue from the services business was estimated at nearly $20 billion last quarter, up 18% year-over-year. Apple's user installation base has increased thanks to increased device sales and increased user engagement, which is good for the services business, and this trend seems to have continued in the last quarter.
It's also worth noting that the gross margin of the services business is much higher compared to the products sold by Apple. Therefore, a significant increase in services should have a positive impact on the company's earnings.
There are several reasons to believe that Apple will usher in another record fiscal season. Stronger-than-expected data could drive tech stocks soar, which is why investors still on the sidelines may want to buy Apple's stock price before it becomes expensive.
Analysts expect a slowdown in the second quarter
According to investment bank Cowen, Apple is expected to report solid first-quarter results consistent with Wall Street consensus expectations due to improved supply conditions.
Cowen analyst Krish Sankar has an overall positive view, but is cautious about the second quarter.
All in all, he believes Apple's earnings report will be in line with expectations due to healthy demand for the iPhone, increased Mac market share, and improved component supply.
Sankar believes that Apple's iPhone sold 60 million units in the first quarter, higher than his initial sales forecast of 58 million units. In the slower second quarter, Cowen's forecast was 46 million, up slightly, compared to 45 million previously.
Sankar believes that Apple's paying users have already exceeded the threshold of 800 million in the first quarter of this year, up from 785 million before 2021. He believes that for the second quarter of 2022, Apple's revenue will be the same as the previous quarter, due to the interference of the epidemic on consumer behavior.
The analyst also said he believes the combination of iPhone and Mac devices, along with rising service sales, could push gross margins in the first quarter into the 42.5 percent to 43.5 percent range.
Entering the second quarter, weak demand for iPhone SE and the pandemic could pose a risk to Apple's profits.
Sankar reiterated his "overweight" rating for Apple and set a 12-month price target at $200. This target is based on a 24x price-to-earnings ratio and 40x price-to-earnings ratio for Apple's core business and a 40x price-to-earnings ratio for the services business, which is 31x based on Cowen's forecast for $6.38 per share in 2022.
