Apple likely to report a rough quarter after a solid year in 2019
Apple (NYSE: AAPL) had a monster year in 2019. The company more than doubled its market capitalization following the launch of new iPhones and more services businesses. However, 2020 is shaping up to be a tough year amidst the economic turmoil from the coronavirus.
Services business to be in focus
Shareholders will focus in Q2’20 on the services business which grew 16.7% in Q1’20 to $12.7 billion. During the quarter, services contributed as much to the bottom line as the retail stores.
However, stores have been shut through most of Q2’20 due to the COVID-19 outbreak. It is expected that the services business may take up much of the slack.
The services business comprises gaming and video streaming services Apple Arcade and Apple TV+, a news service, payments service Apple Pay and digital content stores iTunes, Apple Music, and the App Store. The business has shaped up as a key growth driver after the company’s hardware sales growth stagnated in recent times.
The services business grew from $7 billion in Q2’17 to $12.7 billion in Q1’20, and is estimated to scale $13.2 billion (up 3.9% quarter-on-quarter) in Q2’20.
Analysts project that these figures from the services business can help the company raise it’s gross margin to 32% for FY’2020, a major catalyst in margin expansion which in turn can help boost the company financials.
iPhones to be a drag
On February 17th, the company withdrew its revenue guidance due to supply chain and demand issues arising from the coronavirus.
Before the withdrawal, the company was expected to report revenue in the $63 billion to $67 billion range, but Wall Street estimates are now $10 billion below that number.
Goldman Sachs updated Apple’s rating to a Sell, citing low projected iPhone sales because disposable incomes have fallen substantially given the current economic scenario.
Analysts at Bernstein and Evercore also expect the company to add between $75 billion and $100 billion to its stock buyback program given an attractive price at a decent discount from its 2020 high and its high market value is making it tough for the company to offer an attractive annual yield.
The Apple chart has shown strong support at the $220-$230 range from where it has rebounded strongly.
However, disappointing quarterly numbers may lead to a retest of that level, confirming that the latest bounce was only a bear rally.