People aren’t upgrading their phones as frequently as they did a few years ago, leaving smartphone makers like Apple struggling to grow revenue. Fortunately for CEO Tim Cook, his efforts to diversify the company’s products are at least keeping sales from shrinking.
Still, Wall Street has tempered expectations for the iPhone maker when it reports quarterly financial results on Tuesday after the market closes. Analysts forecast that Apple had $53.3 billion in fiscal third quarter sales, essentially unchanged from a year ago. They also forecast earnings per share of $2.09 on average, down 11% from last year.
Within the revenue total, phone sales are expected to decline $3 billion, or 11%, to $26 billion, marking the third straight quarter of decreases. But modestly growing sales of iPads, Mac computers, wearables like the Apple Watch, and services like Apple Music will offset that drop, according analyst forecasts compiled by FactSet.
Wall Street’s modest expectations stand in stark contrast to the performance of Apple’s stock, which has gained 34%, beating the 20% gain in the S&P 500 index in 2019. Over the past month alone, Apple’s shares are up 7%.
That rise could set Apple’s stock price up for a tumble if the company’s quarterly results disappoint. Investors will be focused not only on the just-completed quarter, but also Apple’s forecast for the upcoming quarter. On average, analysts expect sales of $61 billion from July through September, or 3% less than a year ago.
Analysts remain wary that trade tensions with China and associated nationalist fervor growing in the global economy could hurt Apple. The company depends on manufacturing its devices in China to supply the rest of the world, leaving it vulnerable to a trade war between the U.S. and China. “The company faces multi-year risks related to potential costs from tariffs, nationalist buying behavior in China, regulatory action in Europe, and a variety of pressures to iPhone gross margins,” Andy Hargreaves, an analyst at KeyBanc Capital Markets, wrote in a report last week.
President Donald Trump and Chinese President Xi Jinping declared a truce of sorts in the trade war at the G20 meeting in June. But some tariffs remain in place and the rancor between the two countries continues.
The situation remains difficult for Apple, which is seeking waivers from further tariffs. The levies on its products mean either higher prices for consumers, if Apple chooses to pass the charges on through higher prices, or lower profits, if it chooses to absorb the charges itself.
“While the apparent de-escalation following the G20 in late June is encouraging, we continue to expect iPhone shipments will remain volatile within China until the trade dispute reaches a final resolution,” Credit Suisse analyst Matthew Cabral wrote last week. And that’s not Apple’s only problem in the region. “Aggressive local competition and a narrower ecosystem advantage in China remain deeper structural challenges for Apple that will likely take more than a trade détente to solve,” he added.
With iPhone sales already in decline, another big risk to Apple may be slowing growth in its services business, its second largest money maker after the phone. Sales of apps are slowing, one of the biggest components of Apple’s services revenue, and new items like Apple’s upcoming video streaming service and credit card, aren’t going to be major contributors for a long time, notes Goldman Sachs analyst Rod Hall. “We also do not see various new services offerings driving enough additional earnings to make a material difference to Apple’s slowing growth profile,” he wrote in a report last week.
Apple is expected to update its iPhone line up in the fall, but analysts don’t expect many compelling new features on the horizon for the 2019 line up that would encourage customers to buy them. Instead, many potential upgraders may be waiting for 2020, when Apple is expected to add 5G capabilities to the iPhone and possibly introduce a folding model, according to some reports. “Any weakness in Fall 2019 iPhones sets up for an even stronger cycle in Fall 2020 with potentially 5G and foldable phones,” Timothy Arcuri, an analyst at UBS, wrote on Monday.
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