What’s normally a ho-hum quarter for iPhone sales will be interesting for Apple Inc. this year as the COVID-19 crisis prompts big changes in the way people shop for electronics.
After closing all of its stores outside China in March, Apple
began reopening some U.S. locations in May before it then had to scale back those plans and re-close certain locations due to a worsening of the pandemic in many U.S. states. Executives admitted in late April that Apple’s store closures as well as those of sales partners had the potential to impact the business in ways investors may not have immediately considered. Apple saw pressure on demand for iPhones and Apple Watches, and Chief Financial Officer Luca Maestri said that Apple also expected a negative effect on Apple Care insurance plans.
That’s a critical trend to consider, according to Raymond James’ Chris Caso, since Apple Care is an important part of Apple’s fast-growing services segment, making up perhaps 25% of revenue for that segment, according to his estimates. Apple Care “tends to move along with iPhone units,” he said, indicating that the company’s services segment is more closely tied to phone sales than some may think.
Apple had reopened China stores at the time of its last earnings call and the company pointed to improving trends there following the reopenings, though store traffic still wasn’t back to where it had been prior to the lockdowns.
offered more recent indications of a snapback domestically, with Chief Executive John Stankey sharing on the company’s July 23 earnings call that “traffic has bounced back in the stores.” While the traffic is “not quite entirely back,” customers also seem to be coming around to the idea of curbside pickup.
On the production side, the pandemic is expected to slightly delay Apple’s traditional fall iPhone launch. Analysts now expect the phones to be announced in October rather than September. Caso told MarketWatch that COVID-19 concerns have likely made it more difficult for Apple to check in on production in China.
What that means on a practical level for the upcoming earnings report is that the company probably won’t give a quarterly financial outlook when it reports results after the closing bell on July 30. It skipped a forecast last time around as well.
Apple typically counts a few weeks of new iPhone sales in its September-quarter numbers but won’t be able to this year if the widely anticipated delay indeed occurs. The company also doesn’t like to telegraph its plans much, and Caso reasons that a forecast excluding iPhone 12 sales expectations would be a dead giveaway for investors that Apple intends to delay the device launch.
What the numbers are saying
Revenue: Analysts surveyed by FactSet expect that Apple did $51.12 billion in sales for its fiscal third quarter, down from $53.81 billion a year earlier. Back in late February, analysts had projected $58.76 billion in June-quarter revenue.
Earnings: The consensus forecast calls for $2.04 a share in earnings, down from $2.18 a share a year earlier and below the $2.55 a share that analysts had been expecting as of the end of February.
Stock movement: Apple shares have added 35% over the past three months as the Dow Jones Industrial Average
of which Apple is a component, has risen 13%. The S&P 500
is up 16% in that span.
Of the 37 analysts tracked by FactSet who cover Apple’s stock, 26 have buy ratings, eight have hold ratings, and three have sell ratings. The average price target listed is $364.81.
What the company is saying
June 24: Apple confirmed in a statement that “with an abundance of caution” it was temporarily shutting seven stores in the Houston area. The company has closed stores in other states as well, including in California, North Carolina, Arizona, and Virginia.
May 17: Apple announced in a press release that nearly 100 of its global stores were open at the time. “Our commitment is to only move forward with a reopening once we’re confident we can safely return to serving customers from our stores,” the release said. Apple added that “a store opening in no way means that we won’t take the preventative step of closing it again should local conditions warrant.”
April 30: Chief Executive Tim Cook said on Apple’s earnings call that the company saw “saw downward pressure on demand, particularly for iPhone and wearables” due to temporary store closures. Maestri said that the advertising unit of Apple’s services segment “has been impacted by overall economic weakness and uncertainty on when businesses will reopen.”
Apple reported $2.55 a share in earnings on revenue of $58.31 billion, up from $2.46 a share and $58.02 billion, respectively, in the year-earlier quarter. The company also announced that it would add $50 billion to its buyback authorization and boost its quarterly dividend by 6% to 82 cents a share.
What analysts are saying
• “If stores remain closed, that will have an effect on things,” Raymond James’ Caso told MarketWatch in a phone interview. He joked that it would be hard for the company to “have lines around the block at the Fifth Avenue store,” a customary tradition among iPhone die-hards on Apple launch day that has gradually diminished as online orders become more popular. Caso has a market outperform rating and $400 target on Apple’s stock.
• “While iPhone demand remains anemic, we see a Jun-Q trough and signs of a recovery,” wrote CFRA Research analyst Angelo Zino. “It is also important to note both the Mac and iPad businesses are benefiting from recent developments related to COVID-19, as employees are forced to work from home and invest in PCs/tablets.”
• “While we expect the next iPhone to launch in C4Q20, production volumes and availability could be marginally slower due to the impact of COVID-19 on overall development timelines. We view this shift in volume production by a month or two to not be material in the long term.” -Cowen & Co. analyst Krish Sankar, who has an outperform rating and $400 target on the shares.
• “Following favorable data showing large increases in [over-the-top] consumption during the pandemic, we anticipate strong results in Apple’s streaming business,” wrote D.A. Davidson analyst Tom Forte. He said that 2020 was supposed to be Apple’s big year of 5G but has instead become “the year of the pandemic.” COVID-19 “has stimulated demand for what had been some of the slower growing products in its portfolio, such as laptops and tablets.” Forte has a buy rating and $355 price target on Apple shares.
This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses, and will be updated. It was originally published on April 6.