Apple Earnings Preview: What We’re Watching

Apple (NASDAQ:AAPL) is set to announce its Q1 FY2012 results on January 24 after the market close. We expect Apple to have a record quarter led by phenomenal iPhone 4S sales. The iPhone 4S was launched at the start of the quarter and saw record sales of 4 million in the very first weekend. Demand remained high throughout the quarter as both the top U.S. wireless carriers that sell the phone, Verizon (NYSE:VZ) and AT&T (NYSE:T), expect to set smartphone sales records of some kind when they release earnings. Notwithstanding the launch of Amazon’s popular and much cheaper tablet, the Kindle Fire, we also expect iPad sales to be strong, boosted by the holiday season.

See our complete analysis for Apple stock here

iPhone Set to Break All Records

Last quarter, Apple posted lower-than-expected sales of iPhone as customers postponed their iPhone purchase in anticipation of the launch of a newer and better model next quarter. Consequently, Apple lost market share to Samsung in the global smartphone market. ^[1] The launch of the iPhone 4S should help Apple gain much of that share back.

In another article titled Apple’s 4S Data Show Huge Pent Up Demand Among Smartphone Buyers, we discussed that the research around the iPhone 4S sales suggests that Apple’s upcoming quarterly results are in for a very positive surprise. We are expecting Apple to sell around 26 million iPhones this quarter, an increase of about 53% over last quarter and 62% over the year-ago quarter.

Recent announcements by Apple’s component suppliers as well as iPhone distributors strengthen our belief. MFLEX and Foxconn, both of which supply parts of the iPhone, announced very strong results for the quarter. ^[2]

Apple’s long-time iPhone partner, AT&T, also announced that it was expecting record smartphone sales this quarter, buoyed by strong iPhone demand. (see AT&T Surfs the 4S Wave to Record Smartphone Sales This Year) The country’s largest wireless carrier, Verizon, also went on record saying that its iPhone sales this quarter will double up from last quarter. ((Verizon iPhone sales double to more than 4.2 million in Q4, BGR, January 4, 2012))

The iPhone is the most valuable product for Apple and accounts for more than 50% of our $500 price estimate for Apple stock. Hence any surprise in iPhone’s sales will be met with huge enthusiasm, which should boost Apple’s stock. Our price estimate for Apple stock is about 20% above market price.

iPad Will Also Break Previous Record

While the iPhone 4S has in all likelihood been a runaway success, we will be closely looking at iPad sales for any signs of weakness. Last quarter saw the arrival of the Kindle Fire as well as the Nook tablet just ahead of the holiday season, and this may have caused a shift in customer preference from the pricy iPad to its cheaper competitors.

However, we still maintain our estimate of around 14 million unit sales for the quarter, which would be a record for the iPad’s quarterly sales. (previous record: 11.12 million sold last quarter)

Part of our optimism stems from the fact that the tablet market is still in a nascent stage with very few popular tablets, so we believe there is enough room for more competitors to enter and coexist. Moreover, we think that a cheaper 7-inch tablet appeals to a different segment of population that includes mostly price-conscious consumers. The entry of the Kindle Fire has lowered the cost barrier and will pave the way for new consumers entering the tablet market. This will serve to whet consumer appetite for tablets and may even make customers shift to a costlier tablet such as the iPad for their future purchases.

In any case, Apple has historically lowered the prices of the older versions of its mobile devices as it launches new ones. We see Apple doing the same for the iPad as well as it addresses the demands of the growing tablet market.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Strategy Analytics: Samsung Becomes World’s Number One Smartphone Vendor in Q3 2011, October 27th, 2011 [↩]
2. Suppliers’ Big Numbers Bode Well for Apple Earnings, AllThingsD, January 12th, 2012 [↩]