Apple: Should You Be Worried?

As we approach Apple’s (AAPL) earnings report on May 1st, more and more negative news seems to be piling up. Data points suggest that a couple of key product categories are not doing well, and some are even questioning Apple’s capital return strategy. While I don’t think shareholders should be in all out panic mode just yet, I do think there are reasons to be a bit more cautious.

First of all, Apple’s fiscal Q2 report is the one time a year where management updates its capital return plan. This year, investors are expecting a lot considering US tax reform, repatriation, and the company’s plan to get to a cash neutral position in the future. While I’ll cover an expected dividend raise and buyback hike in the coming weeks, the bear camp seems to think that Apple will use a massive buyback to try to overshadow poor results. A buyback will help earnings per share, but if sales are struggling, some investors might wish the company made some acquisitions as well to help the top line.

Outside of the capital return update, I want to hear from Apple management if the battery replacement program is hurting iPhone sales. In my most recent article on the name, I discussed how one Street analyst discussed weak smartphone data out of China, and another analyst recently suggested that iPhone builds for later this year will be down quite a bit over last year:

Based on our channel checks with suppliers, we think current expectation for new iPhones production is ~80M–90M units for 2H18, below suppliers’ expectation of ~100-120M units for iPhone 8/X in early 2017.

After the bell on Wednesday, we also received the quarterly PC shipment estimate from IDC. As you can see in the table below, the research firm thinks that Apple’s sales were down almost 5% in calendar Q1, resulting in market share loss thanks to overall sales being almost flat. Apple also fell into 5th place for the fiscal Q2 period. While supporters will wait for official results from the company, I’ll note that last year’s Q1 estimate from IDC was nearly dead on to Apple’s result.

(Source: IDC article linked above)

Now I mentioned in a past Apple article that analyst estimates have been coming down, especially for the June quarter that we’ll get guidance for in a few weeks. Currently, analysts call for $52.31 billion in fiscal Q3 revenues, the lowest that I’ve seen and down nearly half a billion dollars in the past month. Reports of weak demand for the HomePod isn’t likely to help the situation.

Additionally, if I look at estimates for the March ending period to be reported, analysts are less than $200 million from Apple’s guidance midpoint. Don’t forget that guidance was weaker than expected to begin with. As the chart below shows, this is the second most bearish Street stance going into a report in the last two years. Dollar values are in billions, with the difference being the estimate compared to guidance midpoint.

*Current Street estimate, seen here. Guidance taken from quarterly reports on Apple’s financial information page.

While I still think Apple is a good long-term investment, there seems to be some concern building in the short term that could give investors some pause. IDC estimates that the company did not have a good PC sales quarter, and iPhone data might be coming in softer than expected. While an increase to the capital return plan will be nice, will it be enough to overcome potentially bad results?

As seen in the chart below, Apple has underperformed the Nasdaq so far this year, a trend that could continue if recent data points show growth is not coming in as hot as originally thought. Apple is less than 1% from its 50-day moving average, so if it breaks below that key level, it could trade down to the 200-day which by next week will likely be around $165.

(Source: Yahoo! Finance)

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