Apple’s stock is up 30% since the second quarter, with all eyes now on the tech giant’s upcoming earnings report scheduled for August 1.
Apple’s stock is up
Bernstein analysts expect Apple Inc (NASDAQ) Q3 earnings to align closely with consensus estimates. They project revenues of $83.7 billion, a 2.3% year-over-year increase, compared to the consensus estimate of $84.3 billion.
Revenue Growth Drivers
The anticipated revenue growth is supported by:
- Improving iPhone sales in China
- Strong performance in the iPad and Mac segments
Modest Revenue Upside
“That said, we do not expect material revenue upside in the quarter,” the investment firm’s analysts added.
Q4 Projections and Investor Sentiment
Looking ahead to Q4, the consensus models higher-than-seasonal growth, which Bernstein views as aggressive. They predict that Apple might guide lower on revenue for Q4, estimating $89.3 billion compared to the consensus of $92.3 billion. However, they believe this guidance might not heavily impact investor sentiment, as attention is shifting toward the iPhone 16 and FY 2025.
Future Upgrade Cycles
“A key question is whether an upgrade cycle could get pushed out beyond FY 25,” Bernstein analysts continued. They expect AI functionality to lead to a strong upgrade cycle and believe that spreading AI tailwinds between the iPhone 16 and 17 cycles might benefit the stock.
Key Areas to Watch in Upcoming Earnings
Services Unit Growth
Analysts highlighted the growth in the company’s Services unit, which has outgrown the rest of Apple’s business. They project Services revenue growth for Q3 at 13% and 12% for the year, supported by:
- Strong growth in iCloud
- Licensing
- The App Store
Health of China Business
The health of Apple’s China business remains a concern despite stronger iPhone volumes in May. There are doubts about the accuracy of third-party data and the sustainability of this strength, given that it partly resulted from discounting.
Product Gross Margins and Future Pressures
Apple’s product gross margins have improved significantly, driven by factors such as a higher iPhone mix and lower depreciation expenses. However, Bernstein analysts caution that rising memory prices and price concessions on iPhones could pressure margins in the future.
Gross Margin Forces
“While the impact might not be felt until the iPhone 16 cycle, we believe investors should closely monitor commentary around the gross margin forces at work. We forecast Q4 gross margins to decline sequentially from 46.3% to 46.1%,” analysts wrote.
R&D and Capex Spending Plans
Changes to R&D and capex spending plans, particularly related to the build-out of private cloud compute, and broader commentary on Apple Intelligence will also be closely scrutinized.
Bernstein’s Outlook
Bernstein has reiterated an Outperform rating on AAPL stock ahead of its Q3 report, with a price target of $240.
“We believe recent enthusiasm is likely to persist in the near term, as Apple is increasingly seen as an AI leader rather than a laggard, and the stock is also in its seasonally strong trading period,” the firm’s team explained.
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