Will Apple 3rd quarter results be a function of seasonality?

Apple has emerged as one of the most widely recognised brands in the world, with a loyal consumer following of its premium electronic equipment offering. 

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Apple is now the largest globally-listed company in terms of market capitalisation and is scheduled to release third-quarter earnings for 2014 on Tuesday 22 July.

Historically, Q3 revenues for Apple have been relatively subdued in lieu of the Q4 releases of new product models such as that of the iPhone.  Consumers generally tend to wait for these newer products and, in turn, meaningful revenue and sales gains have been realised previously in the first and fourth quarter rather than the third. In the last results release, the company guided that it expects third-quarter revenue to be between $36 and $38 billion with a gross margin of between 37% and 38%. This would equate to a revenue decline from Q2 2014 of between 12.8% and 17.4%, with gross margin diminished by around 1.3% to 2.3%. The forecast would also equate to a marginal 1.9% to 4.8% revenue gain from 2013’s third-quarter comparative, with gross margins more or less unchanged. A mean of analysts’ estimates expects revenue to be towards the upper end of Apple’s guided range, at $37.9 billion, with the company’s earnings expected to be in the vicinity of $1.23 per share.

The iPad is considered to have a longer time horizon in terms of replacement cycle and carries less availability in subsidised contractual support. iPod sales are in a declining sales trend while Mac computers hold a perennial consistency in its sales. For a beat on consensus earnings estimates for the quarter, iPhone sales find the most relevance as they account for more than 50% of the company’s revenue. Having its products rolled out in China and Japan through the respective countries’ largest carriers could provide the meaningful impact to sales, a luxury not available in last year’s comparative. China mobile, the world’s largest wireless carrier, launched its iPhone offering in late January this year. The mobile company has more than 750 million customers and it will be interesting to see whether the first full quarter of the iPhone product offering has started to gain traction.

Although a softer quarter may be realised, in line with the historical seasonal trend, the full-year outlook is likely to be bolstered by the launch of updated products (as it has in the past) such as the highly anticipated iPhone 6 and new iPad. A fresh new product line launch, such as that of the rumoured 'iWatch' could have a meaningfully positive impact on earnings should it occur. Although the iWatch has not been confirmed by Apple as of yet, speculation thereof finds support in the company’s hire of watchmaker Tag Heur’s Patrick Pruniaux, as well as a few new employees who have worked on Nike’s wrist-worn activity tracker and fitness monitor, the FuelBand. With the success of the still market-dominant iPad tablet, and iPhone's cannibalisation of a former breadwinner for the company, the iPod, one would think the addition of a new revenue stream via product diversity is nearing.  Perhaps the recent announcement that Apple is acquiring Beats Music and Beats Electronics for around $3 billion could witness a new integration or a reboot of a product such as the iPod. Apple CEO Tim Cook when referring to the acquisition has said 'we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world'. 

Apple remains an investor favourite and in the last few months we have seen investment upgrades (to overweight) from the likes of Morgan Stanley, Barclays and Citigroup. A Thomsons Reuters poll of 53 analysts shows an average rating of buy for the share, with only one of the analysts recommending a sell. 

After a more than 30% share price gain since mid-April 2014, Apple finds itself in overbought territory. The price is currently testing support at 94.30, a break of which would favour short-term downside, with the next level of support anticipated at 89.65. The long-term trend remains firmly up, as gauged by the price trading above the 200-day simple moving average (blue line). With this in mind, short-term weakness could afford trend followers opportunity to accumulate rather than trade against the underlying long-term uptrend. 

Apple Chart 17 July 2014

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