Earnings Preview: Market darling Apple to continue its ascent higher?

Apple’s share price has been on a tear since its March lows as the pandemic led to work, learn and play from home, thereby increasing demand for Apple’s hardware and software products. The question on trader’s minds is - will this week’s earnings (27/1/2021 after market close) be the catalyst to continue the upward trend or will the share price take a breather if earnings disappoint. The street is expecting $1.404 on the EPS front and $102.111 bln in terms of revenue. Some other key metrics are listed below. Hopefully Apple will provide guidance on its outlook for future quarters as investors have been left in the dark due to the uncertainty of the pandemic in previous quarters.

Source: Bloomberg

Let’s take a quick look at some of the green shoots which should provide a tailwind to the share price going forward. Apple is well positioned to take advantage of a significant upgrade cycle due to one of the biggest new tech trends – 5G. I expect robust sales on the back of the new iPhone 12, with the more premium (higher margin) Pro and Pro max models seeing solid demand too. iPhones should also see some additional buying on the back of pent up demand and the new stimulus checks soon to be deployed in the USA. TrendForce expects the iPhone to account for 35% of 5G smartphone sales in 2021. iPhone sales still make up the bulk of Apple’s revenues around 44%. I will be looking at sales figures in China to see if Apple can continue to eat into Huawei’s smartphone sales. Another interesting development which should help Apple expand their profit margins is the introduction of their own M1 chips (should be cheaper) to power Macs, replacing the Intel chips previously used. The wearables range is also something to keep an eye on – particularly the Apple watch which will continue to benefit from the push into the health and fitness trend. There is much excitement about Apple’s entry into the auto sector via their supposed self-driving electric car to hit the market in 2024. However, some remain skeptical as to whether they will be developing their own Apple car or will instead license their technology to traditional automakers, given that auto manufacturing is traditionally a low-margin capital intensive business. Apple could still benefit from allowing investors to think it’s adding an EV product to its business model allowing for further PE expansion. When comparing the size of the smartphone market and mobility market, Apple would require a far smaller market share of the mobility market to equate to their iPhone sales.

Moving onto the software side of the business. Apple is introducing Apple One which will bundle together various services for a much better value price tag. $15 a month, will get Apple One subscribers access to Apple Music, Apple TV+, Apple Arcade, and 50 GB of iCloud storage. Mobile gaming and personal cloud storage are expected to be seriously high growth sectors for Apple. The services side of the business is a great addition for Apple as the subscription style earnings are recurring, predictable and stable offering a resilient, defensive component for Apple. The margins are also much higher than the hardware side of the business. In the face of antitrust scrutiny Apple has had to cut its 30% App Store commission fee to 15% for smaller developers. I don’t see this having a substantial impact on earnings unless it gets applied to the larger developers who make up the bulk of earnings.

Apple has a solid history of beating earnings estimates (8 of the previous 8 quarters) and should maintain this trend for this week’s earnings. The average price change is 2.4% on the day of reporting and implied volatility comes in at 4.9% providing traders with enough volatility for trading opportunities.

The technical picture shows the white solid uptrend line from the March lows is still in tact. All the moving averages are pointing upwards. The momentum indicators aren't in overbought exhausted territory either. If price was to have a pullback there is a gap in the charts around the $132 level complimented by previous resistance now turned support. Below that you've got the pink 21-day EMA coming in around the $130 level. Price candles have breached the upper band of the Bollinger Bands which could keep large gains in check.