- Reports Tuesday, May 1, after the close
- Revenue Expectation: $60.95B, EPS: $2.68
Ahead of Apple’s (NASDAQ:AAPL) Q2 2018 earnings report on May 1, the market seems to have reached a consensus on one thing: the computer and media device behemoth, which manufactures the iconic iPhone, is struggling to grow.
Analysts at some of the biggest Wall Street research firms are downgrading their iPhone sales numbers and forecasting more downside for the company’s share price. These bearish sentiments have weighed heavily on Apple stock, pushing it lower by almost 10% since it reached the 52-week high in mid-March, clouding the tech giant’s future outlook.
Smartphone Super Growth Cycle Ending?
The biggest threat to the longevity of Apple’s “super growth cycle” is the global trend in smartphone sales, showing consumers are no longer excited enough about recent upgrades to devices from all manufacturers, slowing the recent trend of flipping their smartphones each cycle. Instead, they’re now opting to hold on to older, existing devices for longer.
Global smartphone sales declined for the first time on record in 2017, according to a recent report by the International Monetary Fund, with 1.5 billion units sold last year. Apple sells the majority of new iPhones to those who want more advanced models, which makes the company's sales highly sensitive to how often iPhone owners are willing to ditch their older phones in favor of acquiring the newer models.
If this trend continues it has major implications for smartphone makers who rely heavily on this product segment to drive growth in their overall business. Apple’s iPhone sales generated about 70% of the company’s revenue in the first quarter of fiscal 2018. Last year, iPhone sales accounted for more than $141 billion in revenue for 62% of its total earnings.
If we accept that smartphone growth has reached a cyclical peak and no amount of innovation from Apple will drive consumers to buy more of its gadgets, then why should you invest in Apple shares today?
In the short-run, we think this argument makes sense. Apple shares are not going to outperform if the company is finding it tough to continue with its explosive iPhone sales growth. But if your investing horizon is five years or more, we view any weakness in Apple stock as a buying opportunity. Here's why.
Countering iPhone Sales Weakness
Apple’s recent strategic moves indicate that the company is acting quickly to counter potential weakness in its iPhone segment. Its services business, which incorporates revenue from things like the App Store, AppleCare warranties, iCloud, and Apple Music is now the company's second largest revenue generator. Last year, it brought in roughly $30 billion over the past fiscal year. Apple has the potential to once again surprise the market on this front.
If Apple continues to garner more sales from its other divisions, by convincing consumers to buy its products as a way to seamlessly integrate its solutions, the bearish spell for its stock will be over soon. For long-term investors, there is one more reason to be excited despite the negativity surrounding Apple's stock.
The company is planning to further increase its capital return plan which is already the biggest in corporate history. Apple’s cash hoard jumped to $285 billion, adding to the pile of offshore money that the company plans to repatriate back under new U.S. tax legislation.
Look for details of its share buyback plans which could be revealed during Tuesday's earnings call. According to some estimates, Apple might boost its share buybacks to as much as $400 billion from its current authorization of $300 billion. That would mean buying back more than a third of the company over the next several years, sending an extremely bullish signal to long-term investors whose objective is to earn a decent return through dividends and capital appreciation.