Where next for Apple stock ahead of its Q1 earnings

When will Apple release Q1 earnings?

Apple is scheduled to publish earnings covering the first quarter of its financial year, which runs over the three months to the end of December 2021, on Thursday January 27.

Apple Q1 earnings preview

Apple missed expectations for the first time in over two years when it released its last set of quarterly results last October. That was after the company shipped fewer iPhones than expected thanks to the supply constraints and manufacturing being disrupted in Asia by Covid-19, highlighting that even the largest companies are struggling with the supply chain challenges hitting the tech industry.

Having cost Apple around $6 billion in the last quarter, the supply problems could worsen in the first of its new financial year – and that could be significant considering the last three months of the calendar year homes the busy holiday shopping season and usually marks Apple’s best sales quarter.

Still, Wall Street forecasts revenue will climb to a new quarterly record of $119.33 billion, up over 7% from the $111.44 billion delivered the year before. Analysts expect EPS to rise over 13% to $1.91 in the first quarter from $1.68 the year before.

Sales of hardware – spanning from the iPhone and iPad to Mac computers and its range of home and wearable devices – is expected to experience tepid growth of just 3.7% to $99.21 billion. That is particularly weak considering figures will be flattered by figures from the year before caused by the delayed launch of the iPhone 12.

The biggest fear is that the supply constraint will last long enough to prompt customers to delay upgrading, skip the iPhone 13 that was launched last September and wait for the next model to be introduced. With this in mind, iPhone sales – which account for 52% of Apple’s revenue – during the first half of the financial year will be key in deciding whether Apple can deliver another record year of iPhone sales. Analysts currently believe Apple can sell 240 million iPhones this year, although some have pencilled in lower estimates with Bloomberg suggesting the challenging conditions will see it come in closer to 225 million units.

This also increases the pressure on Apple to accelerate its shift toward services, which boasts higher margins and isn’t suffering from the supply problems hitting the products division. The services division currently accounts for less than a fifth of Apple’s revenue but is growing at a much faster rate - with revenue forecast to rise 18.5% to $18.68 billion in the first quarter - and boasts a gross margin of almost 70% compared to the 35% it makes selling devices. The superior profitability of its services division should allow Apple to absorb increased costs spawning from the products division.

Apple released a lengthy press release earlier this month that revealed there are over 745 million people paying for Apple subscriptions. That is thought to have grown from 660 million in the middle of 2021. Meanwhile, it revealed that its App Store is serving over 600 million people each week.

The services unit offers multiple growth avenues for Apple, with the breadth of opportunity demonstrated by the areas highlighted by the company in the announcement – including Apple Arcade, Apple Music, Apple TV, Apple Fitness, Apple News, Apple Podcasts, Apple Books, Apple Card, Apple Maps, iCloud and its own digital wallet.

Sales of physical devices is expected to continue growing this year, just at a markedly slower rate compared to what investors have become accustomed to, and analysts believe this will remain the trend not only this year but also the next. Therefore, Apple needs to explore as many opportunities as possible to leverage its user base. But it is important to remember that Apple’s ecosystem of services mostly relies on people having Apple devices, so hardware sales remain a key driver to Apple’s ability to grow its services division over the long term.

Returning to this week, Apple’s sales of iPhones and other devices will be key in deciding how the market reacts. A beat would install confidence that supply problems are starting to ease, while any disappointment raises the threat that this could be a disappointing year for iPhone sales. It has the opportunity to counter this with an acceleration in higher-margin services growth.

Wall Street believes all of Big Tech will see a significant slowdown in growth this year following the record sales and profits seen in 2021, but Apple is expected to see the brakes applied the most. Analysts currently expect Apple to report revenue growth of 4.4% and EPS growth of just 2% in the current financial year. That would be a marked deacceleration from the 33% topline growth and 71% jump in earnings in the last financial year. Meanwhile, the rest of Big Tech – Amazon, Alphabet, Meta and Microsoft - is expected to continue delivering double-digit increases in revenue and superior earnings growth in 2022. If Wall Street’s forecasts come to fruition, then we may also see Apple, which became the first company to briefly surpass a $3 trillion valuation in early 2022, dethroned as the world’s most valuable publicly-listed company.

You can read more about the challenges Big Tech faces in 2022 in our outlook piece here.

Where next for AAPL stock?

Apple shares have lost over 10% in value since the start of 2022, largely in-line with broader falls seen in Big Tech stocks in the new year.

If the current trend persists, as suggested by the bearish RSI and rising volumes, Apple shares could once again test the 100-day sma at $156. A break below there opens the door to $147, a key level of support throughout October and November and in-line with the 200-day sma.

The hammer candlestick that emerged yesterday suggests more sellers entered the market to fuel the selloff in shares before being countered by an influx of buyers that helped push the stock higher. This could indicate a potential reversal is about to occur that could send the stock higher, although this would need to be confirmed today. If the stock can start to find higher ground again, then shares are initially targeting the 50-day sma at $168 before it can start to eye the $183 all-time high hit at the start of 2022.

(Source: Eikon)

The 43 brokers that cover Apple have a Buy rating on the stock and believe the selloff since the start of the year has been overdone, with an average target price of $180.84 implying there is over 14% potential upside from the current share price and fresh record highs on the cards.

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