Will Apple earnings improve sentiments on falling Wall Street?

Apple (AAPL.US) is the world's highest valued company with more than $3 trillion in capitalization and one of Wall Street's main drivers. After today's session, it will report its Q2 earnings report. In 2022, it showed considerable resilience and lost relatively little against the backdrop of tech giants. In contrast, this year it is gaining nearly 55% against a 40% rally in the Nasdaq. The market in recent months has been excited by the company's stated expansion into VR technology in the fall and the release of the iPhone15 in September. At the same time, strong consumer in the U.S., Europe and better y/y consumer sentiment in China have not led markets to expect revenue growth. Wall Street expects a third consecutive quarter of y/y revenue declines and single-digit declines in iPhone and MacBook sales. However, forecasts may prove key, here they are:

• Revenue: $81.7 billion vs. $94.48 billion in Q1 (2.3% y/y decline) (FactSet) 
• Earnings per share (EPS): $1.19 vs. $1.52 in Q1 and $1.20 in Q2 2022 (FactSet)
• iPhone sales revenue: $39.0 billion vs. $51.33 billion in Q1 2023 (down 2% y/y)
• MacBook revenues: $6.3 billion vs. $7.17 billion in Q1 2023 (down 2% y/y).
• iPad revenues: $6.2 billion vs. $6.67 billion in Q1(down 11% y/y)
• Services revenue: $20.7 billion (up more than 5% y/y)

Seasonally, Q2 is the weakest for Apple. The main threats to sentiment are cautious forecasts and lower sales of flagship iPhones. Recently, technology agencies have reported and weaker smartphone-related business. It is indirectly affected by higher interest rates. The company does not give detailed forecasts from 2020 through which the market will have to rely on comments on sales and the general narrative around the report. Given the size and global reach of Apple's products, markets are also waiting to see if the company will expect higher demand in future quarters. Such a scenario would make a positive 'soft landing' for economies more likely.

Key - emerging markets?

• Apple reported a y/y decline in sales in China in the previous two quarters - from this side there will probably be no positive catalyst and revenues from the Apple third largest market will decline y/y - however, Piper Sandler analysts expect a slight decline in iPhone sales in China;
• Investors will react positively if the company points to the stabilization of the tight situation in the Chinese supply chain (the main place of production) - these have caused lower sales in recent years;
• The market will turn its attention to increasing shares in India, which as the world's most populous country became the company's 5th largest market in Q2 - as a growing market, it can cushion weakness in China. Morgan Stanley estimates that Indian revenues could reach $40 billion over a 10-year horizon;
• Apple's growth in India has been recent and in March it surprised with a record $6 billion in revenue from the country where Android dominates. Analysts stress that the company's positive growth in emerging markets is encouraging long-term investors along with the emerging middle class there.

Services, AI and VR - material for a positive surprise?

• The market may positively receive higher-than-forecast revenue growth from the high-margin services segment (AppStore, ApplePay, AppleMusic, AppleCare) - Detusche Bank points to improvements in the online advertising sector as a possible positive prognosticator;
• With the development of VR technology (VisionPro), which will compete mainly with Oculus (META.US), the market also expects the company to increase its competitiveness with other tech in the shadow of speculation that indicates Apple is developing its own AI model similar to GPT from Microsoft and OpenAI. Wells Fargo, however, expects comments in this regard to be perfunctory.

Apple (AAPL.US) shares are maintaining an uptrend, however, they have broken an almost vertical trend line and if the results surprise negatively - in a situation of extremes, they could look for support at the SMA200 level (red line) near $182. A positive report and forecasts could lift the stock above psychological resistance - up to $200 (record levels). Source: xStation5

Source: Bloomberg Finance LP, XTB Research