Text size

Apple (AAPL) shares today are up $2.95, or 1.8%,a t $165.27, defying a slew of negative reports from the Street in advance of its fiscal second-quarter earnings report tomorrow afternoon, after the closing bell.

Of course, as my colleague Jon Swartzwrote on Friday, the main concern here is weak iPhone results, and the grim speculation continues to flow in advance of the report.

Toni Sacconaghi with Bernstein writes sentiment will probably get worse with the earnings report.

That’s because to him, the set-up now looks a lot like this point in 2016, when the recently introduced “6s” iPhone turned out to be disappointing from a sales perspective, and weighed on both the the March and the June quarters, and beyond:

The concern is that while iPhone expectations have come in considerably among investors over the last two weeks, they also did during the iPhone 6S cycle... but FY Q2 results and FY Q3 guidance still disappointed, and the stock underperformed materially following Q2 earnings […] On net, we see risk-reward going into FQ2 earnings as neutral to slightly negative, and continue to believe that estimates are more likely to go down than up in the near-term. AAPL's expected large capital return program could mitigate the impact, but we believe the investor narrative post-earnings will likely be dominated by whether iPhone can grow over time. Moreover, we see Apple's current valuation as relatively in-line w/ historical averages.

Meantime, there was yet another negative data point this morning: One of Apple's wireless chip suppliers, Broadcom (AVGO), warned that its results in the quarter ending this month are going to be weighed down by “weak” sales of wireless parts.

This is not a total surprise, but Amit Daryanani, who follows both Broadcom and Apple for RBC Capital, writes that Broadcom’s comment "is notable and implies inventory liquidation headwinds (historically July wireless is up ~10%)."

Estimates keep coming down. As HSBC’s Steven Pelayo wrote this morning, “downward revisions within the supply chain have been well telegraphed,” as far as iPhone, "but the magnitude of cuts continues to weigh on expectations."

Tim Long of BMO Capital today cuts his iPhone estimate for this fiscal year to 209 million units from what he thought would be 220 million. He’s also chopping 2019’s expectations.

Pressure is going to continue to be there, writes Long, because consumers just aren’t being induced to upgrade at a sufficient pace:

We believe consumers are satisfied to hold onto their smartphones longer. Although we estimate iPhones get replaced more frequently than competitors’ phones, we believe replacement rates will continue to worsen.

BlueFin Research Partners analysts John Donovan and Steve Mullane, today note that folks like Long are just now catching up with a gloomy view of current iPhone sales that they’ve been offering for months. Actually, their 2018 number is a little less bad than Long’s: they see perhaps 219 million units.

They do, however, offer a cheerful suggestion: “The softness in 2018 will set the stage for a 2019 “recovery” story given the new slate of iPhones and a relatively easy YoY comparison to the depressed 2018 levels."

Whither capital returns?

Of course, another big thing tomorrow is the buyback and dividend update.

Some worry that could disappoint as well.

As I noted this morning, Barclays’s Mark Moskowitz, who has an Equal Weight rating on the shares, cut his price target to $135 from $145, after concluding that a merely in-line capital-returns announcement could disappoint.

Remember that in January, Luca Maestri, Apple’s CFO, said the company had a goal to take the company’s enormous net cash cash balance of $163 billion to zero, or “near zero."

HSBC’s Pelayo today writes that he’s hard pressed to divine exactly how that gets done:

Despite significant increases in our dividend and buyback assumptions, we struggle to get to zero net cash within three years (hence the timing is likely longer term, or our forecasts are just too conservative). During the shareholder meeting in February, the CEO downplayed one-time special dividends to deal with Apple’s excess free cash flow and net cash issues, but committed to increase the annual dividend, adding the company would provide an update on its capital return program during the April call.

For tomorrow, the Street is looking for $61.86 billion in revenue, including unit sales of 53 million iPhones, and EPS of $2.69.

As far as what Apple may forecast for the third quarter, the expectation is $51.72 billion in revenue and $2.13 per share in earnings, including 42 million units of the iPhone.