Apple’s Q2 Earnings: Will they beat expectations?

A woman displaying the two iPhones she bought on the opening day of iPhone 5 sales

Rewind 3 years to 2011, and this same headline would be filled with optimistic expectations in which virtually all analysts would be espousing Apple’s exceptional year-on-year growth, and justifying why Apple has tremendous potential and a must buy for any investor.

Flashing back to the current day, and analysts from numerous companies are looking forward to a rather insipid quarter with virtually no growth in revenue, and in some instances, a slight decline. Apple is slated to report its Q2 2014 results on April 23 after the markets close, and Wall Street has expectations set at a revenue of $43.6 billion. According to Thomas Reuters, analysts consensus currently stands at about $43.55 billion with an EPS (earnings per share) of $10.17. The analyst consensus for iPad sales is 19.3 million unites, a 0.5% increase from iPad sales of Q2 2013. iPhone sales, which constitute a bulk of Apple’s revenue (52.6%), are projected to be around 38.2 million units, a 2% increase from last year’s quarter. The gross margins for Apple’s second quarter is expected to be about 38.1%, a tad bit higher than previous quarter which clocked in margins between 36-37%.

Overall, analysts and investors are not looking forward to a blow-out quarter, but instead to a rather flat and dull quarter.

Furthermore, it is likely that Apple will increase their share buyback by another $30 billion. As Toni Sacconaghi from Bernstein Research stated in a report, “We expect Apple to announce a decision on incremental cash returns on its earnings call”.

However, the subject does bring up the question: What happened in the interim between 2012 and 2014? Why is it that Apple’s analysts are extremely wary and circumspect about this upcoming quarter?

Apple, three years ago, was in its prime as the smart phone industry was a burgeoning market which was expected to grow rapidly, however, that market has run its pristine growth, and now is not expanding as rapidly as it one used to. This phenomenon combined with stiff competition from Android and shrinking profit margins due to competition have impacted revenues. Hence, as a result, Apple is experiencing the tailwinds of a global phenomenon. Regardless, Apple has, in comparison, maintained it’s earnings and had an exceptional, and unprecedented quarter in January with revenues of about $55 billion on an EPS of $14.51.

As for my personal advice, I believe that Apple is still a very healthy company and holds a great deal of potential in the future. Shifting focus to the second half of the year, Apple is rumored to be releasing two new iPhones, one which will have a 4.7″ screen while the other will have a 5.5″ screen, an iWatch, an upgraded iPad Air, iPad Mini, iMac and Apple TV. In addition, the company is also rumored that a smaller 12″ Macbook will be released. Given the (alleged) ambitious product release, Apple should receive a fresh impetus in terms of revenues, and quarterly growth. Plus, given their $176 billion cash reserve, Apple, Inc. is a very stable and wealth company. Hence, I have a BUY rating on Apple, with a target-price of $625.

Be sure to have a look at Apple’s quarterly earnings on April 23. All of Wall Street will be watching.

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