Apple (AAPL) earnings preview - Q4 2016 due after close Tuesday, October 25th

Apple is due to report its fiscal Q4 results on Tuesday, with investors looking any signs that the world’s most valuable company is growing revenues again. With the iPhone 7 just released and a new suite of Mac products due, there is a lot of buzz around the stock as it trades at year-highs coming into the earnings update.

The stock has rallied around 20% since the start of July, but remains some way short of the record high hit last year.

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The question for investors and traders is whether Apple can deliver in line with consensus expectations or fall short.

Here are five key things to watch for:

EPS

 

Earnings per share(EPS) is usually the key metric for trading on stocks like Apple. The consensus estimate is for EPS to come in at $1.65 on earnings of $46.81 billion, according to Zacks Investment Research. This would be a decline of roughly 10% from the same quarter a year before and would be the third straight quarter of revenue decline.

The key thing for trade on the Apple stock is whether the actual results will beat or fall short of expectations. Apple beat estimates by 2% last quarter and delivered better-than-expected results for 3 of the last 4 quarters.

iPhone Sales

 

Falling iPhone sales is driving down revenues and EPS. The iPhone is the most profitable part of the business so it’s having an over-sized effect on EPS. For example, last quarter saw EPS decline by 23%, despite revenues dropping just 14%. 

The iPhone accounts for around 60% of Apple revenues so investors will be eyeing sales very closely. The problem Apple has is that the market is reaching saturation point – the kind of double-digit growth in smartphone sales cannot be sustained. Apple just has to hope consumers are impressed enough with the new products to upgrade regularly.

Services

 

The company currently trades on a fairly discounted 10 times forward earnings, versus the 26 times PE ratio enjoyed by Alphabet. Much of that can be attributed to the discount applied to fact that Apple has traditionally had to keep selling more and more phones – something the market is not convinced it can achieve forever.

So when we look at Apple shares, the impact of services revenue on its price is vital, as this is seen as a more sustainable revenue stream going forward, reducing the reliance on the iPhone. With a closed market, the App Store and iTunes represents a secure and ongoing revenue stream that Apple is exploiting more and more.

At 11% of earnings, services accounts for an ever larger source of revenue – investors will be wanting to see this area of the business continue to grow to offset waning iPhone demand.

Forward Guidance

 

With the iPhone 7 just released, investors will want to see clear evidence that it’s performing in terms of orders and sales. The first full quarter for the iPhone 7 is the Oct-Dec period, Apple’s Q1 2017. Could declining sales finally be arrested in the key holiday quarter? What Apple says about the upcoming quarter could be more than important than what’s gone before.

Dividends

 

Apple is sitting on a vast cash hoard and is more than capable of defending its share price by employing this stockpile when required. So don’t be surprised to see a dividend hike and/or share buyback that could support the stock in the short-term, even if the earnings undershoot estimates. In April the firm upped its dividend by 10% and added $50bn to its capital return programme despite reporting its first year-over-year decline in sales since 2003.