Apple Turns Weak Due To Lower-Than-Expected iPhone Sales

iPhone X introduced in Apple conference 2017 - photo - February 2018Last Thursday was a hectic day on Wall Street. Three major tech giants reported their quarterly results. They were Amazon, Google, and Apple. While Amazon reported better than anticipated results, Google’s posted disappointing mixed results. Let us see how Apple Inc. (NASDAQ:AAPL), the iconic iPhone manufacturer, fared in the fiscal 2018 first-quarter and what it means to the stock price which closed at $160.50 on Friday.

The Cupertino, California-based company reported fiscal 2018 first-quarter revenues of $88.293 billion, compared with $78.351 billion in the similar period last year. Analysts had expected Apple to report revenues of $87.28 billion in the recent quarter.

For the quarter ended December 31, 2017, Apple reported net income of $20.065 billion, or $3.89 per share, an increase from $17.891 billion, or $3.36 per share in the year-ago period. The Thomson Reuters Consensus estimate was $3.86 per share.

The software and services segment revenue increased 18% y-o-y to $8.50 billion. However, it was flat compared with the previous quarter and below analysts’ estimates. Apple’s CEO Tim Cook stated that Apple Store, iCloud, Apple Music, and Apple Pay had their biggest quarters.

Apple’s “other products” revenue, which includes accessories like the Apple Watch, increased 36% y-o-y to $5.49 billion.

Even though the results exceeded estimates, the market was not thrilled as iPhone unit sales in the first-quarter fell below expectations. Apple sold 77.3 million iPhones in 1Q18, versus 80 million units expected by analysts polled by FactSet. A drop in the iPhone sales has also lead to the concerns that the much talked about iPhone “supercycle” is not happening.

For the past year-and-a-half, analysts were reporting that Apple was entering a “supercycle” that would lead to a huge boom in the sales of iPhone X, similar to the one seen during the launch of iPhone 6. However, much to the disappointment of investors, there is no indication of that happening until now. Still, the company managed to post an increase in revenues due to the realization of higher average prices for iPhones. The average price of iPhone sold in the first-quarter was $796, compared to $755.8 anticipated by analysts.

To ward off investors concern, Apple’s CFO Luca Maestri said “We typically don’t go into this level of detail, but I think it’s important this quarter to give you additional color, and maybe the two most important messages are that we believe iPhone revenue will grow double-digits as compared to last year during the March quarter and also and, importantly, that iPhone sell-through growth on a year-over-year basis will be actually accelerating during the March quarter as compared to the December.”

Further, Maestri said “During the week beginning Dec. 24, a record number of customers made purchases or downloaded apps from the App Store, spending over $890 million in that seven-day period, followed by $300 million in purchases on New Year’s Day alone.”

The company expects to sell 50 million iPhones this quarter, below analysts’ expectation of 59 million. Apple expects 2Q18 revenue to be in the range of $60 billion to $62 billion, and gross margin of between 38% and 38.5%. The Thomson Reuters Consensus estimate for revenues is 65.73 billion, while analysts polled by StreetAccount expect a margin of 39%.

Apple’s board of directors declared a cash dividend of $0.63 per share, payable on February 15, 2018. The company will be paying $38 billion tax under the new rules passed in December 2017. Apple, which has cash reserves of $285.1 billion, is planning to spend up to $350 billion in the US over the next five years. Therefore, lower than anticipated iPhone unit sales, and weak guidance is expected to keep the stock of Apple bearish in the short-term.

Technically, the stock is declining after facing heavy resistance at 175. The stochastic indicator is in the bearish zone. Thus, we can expect the stock to remain bearish for the short-term.

Apple - Technical Analysis - 5th February 2018

We may capitalise on the downtrend by investing in a put option. To proceed further, we prefer the stock to trade near $162, and the option contract to be valid for a period of one week.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.