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Apple Earnings Preview: The Calm Before the Storm

October 30, 2019, 11:00 AM UTC

Don’t expect to hear Reese Witherspoon, Jason Momau, or Hallie Steinfeld on the line with Apple CEO Tim Cook during Wednesday’s earnings call with Wall Street analysts. But those three Hollywood stars, and a few others, may hold more sway over Apple’s growth for the next few years than any of the sales and profit figures Cook will reveal about the company’s devices.

That’s because growth in sales of iPhones, iPads, and Mac computers has slowed or declined, leaving Apple increasingly dependent on growth from services like its Apple TV+ video streaming, which debuts on Friday. Investors won’t be able to see if Cook is still wearing the dapper blue suit he was sporting on Monday in New York City at the premiere of Witherspoon’s series for Apple, called The Morning Show.

But even with the analysts, Cook is sure to continue trying to pump up excitement for Apple’s Netflix rival, which features bankable celebrities and will cost $5 a month. He needs to.

In the quarter that just ended, analysts on average expect Apple will report sales of $63 billion, unchanged from last year. Profits per share will come in at $2.83, down about 3%, the analysts forecast.

Investors, who have already bid up Apple’s stock 54% this year, are looking past the current tepid financial results. Video, music, gaming and other services should improve revenue growth next year, and the arrival of 5G phones could also lift sales.

That optimism has helped propel Apple’s stock price to an all-time high of $249.05 on Monday. On Tuesday, it declined 2% to close at $243.29.

The iPhone, which peaked in 2015, remains a problem. Even bolstered by the new iPhone 11 and 11 Pro models, iPhone sales are expected to shrink 12% from last year to $32.8 billion, says Deutsche Bank analyst Jeriel Ong.

Longtime Apple analyst Katy Huberty at Morgan Stanley is even more concerned about current iPhone sales, forecasting $32.7 billion for the latest quarter. One factor depressing sales is Apple’s decision to cut prices on some 2019 models compared with prices on new phones last year. This year’s iPhone 11, for example, starts at $699, down from $749 for last year’s iPhone XR. While Apple may sell fewer phones than last year, the price cuts will compound the damage by reducing the average selling price of all iPhone sales by 2% to 4%, she said.

That puts the onus for faster growth on services and so-called wearables, a category that includes the Apple Watch, headphones, and earbuds.

Currently, most services revenue comes from mobile app sales, which are still dependent on iPhone sales. Cook is trying to diversify, starting with offering Apple Music on both iPhones and Android phones back in 2015. That strategy should get another boost with the video service.

Apple is spending liberally for top-notch talent and making deals to put its streaming service on a wide array of hardware, including Amazon’s Fire TV devices, Samsung smart TVs, and the popular Roku set top box. Still, Apple is entering a crowded field including leaders Netflix and Amazon, plus new arrivals with strong backing from Disney, Comcast, and AT&T.

Apple has already said it will give anyone who buys a new iPhone or most of its other hardware products a free one-year subscription to the video service. But even excluding the freeloaders, Apple TV+ should attract about 10.5 million subscribers in 2020 and 27 million by 2021, Huberty projects. Within five years, it could be at close to 140 million and bringing in $9 billion in revenue, she adds.

“As a result of attractive pricing and device bundling, we believe Apple TV+ will have an attractive adoption curve,” Huberty wrote, using the tech industry term for a rapid gain in popularity.

Analyst Daniel Ives at Wedbush Securities is nearly as optimistic, forecasting 100 million subscribers within four years. “If Apple executes with minimal speed bumps and aggressively acquires content given the company’s massive installed base and unmatched brand loyalty we believe reaching the 100 million subscriber number in the medium term (3 to 4 years) is a realistic goal that could translate into a $7 billion to $10 billion annual revenue stream,” he writes.

Even without Apple TV+, some analysts think that the problem of weak iPhone sales could be erased next year, however. In recent years, older iPhones have been “good enough” compared to brand new models that people are keeping them for almost four years before upgrading, notes CFRA analyst Angelo Zino. But that trend has created a pool of about 900 million owners of aging iPhones who will be ripe to upgrade next year when Apple is expected to introduce its first models with super-fast 5G wireless capability, Zino says.

Current slow sales are happening “as consumers likely just await a 5G ramp,” he writes.