Apple Q2 earnings: levels to watch

Apple is set to announce second-quarter earnings after the US closing bell on Wednesday. Expected earning per share is $10.19, while sales are expected to be $43.531 billion.

Sometimes merely beating earnings expectations is not enough; investors will always look for something more and this is particularly true when it comes to growth stocks.

Despite beating expectations on revenue and EPS in its Q1 earnings release, shareholders were clearly more focused on iPhone sales numbers. Apple failed to meet consensus expectations for 54.7 million units to be sold, despite selling 51 million which was a 6.7% jump in sales year-on-year. Changes in carrier policies in the US were blamed for the drop. The company guidance also dented confidence in the stock: the guided revenue was $42-44 billion in the March quarter, and the mid-point of this range is now what is expected in Q2. Tim Cook tends to give realistic guidance so consensus expectations have not strayed too far from it.

The immediate effect on the stock was an 8% drop and the price action actually punctured the pivotal $500 mark in the following few days, marking a 3.5 month low. In fact, Apple has failed to return over those $550 levels since, having been stuck in a $50 range from the end of January.

Faith in emerging markets

Brushing aside the weakness in US markets, Tim Cook said at the time that the most important growth area for Apple was in emerging markets. The following smartphone sales growth numbers were cited at the time:

- China up 20% year-on-year
- Latin America up 76%
- Middle East/Africa up 65%
- Japan up 40%
- Central/Eastern Europe up 115%

In the past few months, the Turkish lira plunged to a record low against the dollar, the Thai baht diminished by half its value in six months, and the Argentine peso underwent its steepest decline since its financial crisis in 2002. This forced the central bank to relax capital controls in order to stabilise the currency. The effects of Abenomics appear to have run their course, and the yen has seen demand as volatility in equity markets enforced a flight to safety.

As a result, the recurring theme as corporate earnings results kick off this quarter has been adverse currency movements and the effect this has had on sales. These currency depreciations are very likely to have had a knock-on effect on iPhone sales and indeed could continue to do so in the coming months in the markets deemed by Apple itself to matter the most.

Just today, the Chinese yuan today fell to a 14-month low against the dollar after China’s central bank set the official mid-point fixing rate lower for a third successive session. Having just added China Mobile to its arsenal, sales in the short term may be slightly weaker than anticipated.

The question is whether much of this has already been discounted into the stock price, and also whether we will see the price supported as shareholders patiently await new product lines and/or additional buy backs. Anticipation of the new iPhone 6, slated for release at the end of this year, may also have a lagging effect on smartphone sales.

Stock buy backs aside, the company will need to embark on new product lines and updates soon if it is to hold on to the mantel of ‘growth stock’. We might well come to expect weaker guidance again from the smartphone company this time round.

The technicals

The share price broke the uptrend from the summer lows following the Q1 earnings release, and has failed to see enough bidding to re-establish itself in anything but a tight range.

The good news is that price action remains above the 200-daily moving average, which is currently around the $512, and this generally spells a decent buy-on-the-dip opportunity. This area will be closely watched by long- and short-term traders alike, as stop losses and short orders will normally reside below this. We have not seen the stock price trade below this important metric since last September.

Any deviations with a daily close below the $494 area could see a quick decline to $483 (the 50% retracement of the entire June to October move). The bearish channel from the mid-January highs would need to be breached with conviction (daily close above $550) if we are to see the December 2013 highs targeted.

Given the current $50 dollar rectangle range, one could expect to see a measured move in the stock price should we see a breakout or indeed a breakdown.

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