Stock Market

Apple Earnings Could Be Key to Stock Market Turnaround



Világos Gergő

The so-called FAANG technology stocks led the market upward. Now they’re helping to lead it lower. And it could be
Apple

(AAPL), the last of the group to report quarterly earnings on Thursday, that determines the stock market’s next move.

It certainly hasn’t been the other FAANGs—an acronym for
Facebook

(FB),
Amazon.com

(AMZN), Apple,
Netflix

(NFLX) and Google parent
Alphabet

(GOOGL). In mid-October, Netflix turned in third-quarter numbers that cooled concerns about subscriber growth at the streaming video giant. Netflix stock popped on the news, but it’s fallen ever since—and now sits below pre-earnings levels.

Three more FAANGs have checked in since, with mostly similar results. Alphabet stock is off 5% since reporting earnings last week. Amazon, which issued downbeat guidance, has dropped 15%. Like Netflix, Amazon and Alphabet offered some reasons for optimism in their reports. All have still lost ground amid a broader selloff. Facebook stock, which this summer shared an outlook that started its shares on a tumble which has yet to stop, was volatile in after-hours trading Tuesday following a mixed earnings report.

That leaves Apple, scheduled to share fiscal fourth-quarter results Thursday afternoon. Apple stock, which closed Tuesday around $213 per share, has gained 26% in 2018. But it’s off more than 5% in October, compared with the S&P 500’s 9.4% decline—and an 11% fall for the S&P 500 Information Technology Index, of which Apple is a component.

Investors and strategists tell Barron’s they’re looking to the iPhone maker for signals about much more than the number of phones the company sold recently.

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“Last week tech investors saw some of the bloom come off the FAANG sector’s rose,” Wedbush analyst Daniel Rose, who has an Outperform rating and a $310 price target on Apple stock, wrote Monday. He figures Apple’s report will bring good news—and not just for Apple.

“We believe Apple’s earnings and, more importantly, guidance around initial iPhone demand heading into year-end and its trajectory for 2019 will be a positive catalyst for Cupertino (and its investors) as well as the overall tech sector,” Rose wrote.

Wall Street is looking for quarterly earnings of $2.78 per share using standard accounting, and a penny more without it, on revenue of $61.43 billion, according to FactSet. The company has guided investors toward revenue in the $60-$62 billion range.

iPhone sales, meanwhile, are pegged at an estimated 47 million, at an average price of about $729. The outlook, however, will undoubtedly be more important than the look back: Apple’s three latest iPhones are still quite new, with the newest—the iPhone XR—only available late last week.

But there are other reasons to watch Apple’s report, and listen to management’s discussion, closely. For one, Apple’s sheer size—its market capitalization remains above the $1 trillion level it passed, with substantial fanfare, earlier this year—makes it the largest holding in many passive strategies. Apple represents more than 4% of the S&P 500, about 6% of the
Dow Jones Industrial Average,
and 13% of the
Nasdaq
-100.

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Apple is a useful indicator of consumer technology spending. In the second quarter, for example, it accounted for an estimated 12% of global smartphone shipments. And it’s of vital importance to its suppliers: Last week, Rosenblatt Securities’ Jun Zhang argued that investors should stay away from smartphone supply chain companies: In Apple’s case, he wrote, that’s because they may “face risks after the holiday season.”

“We believe this is due to weak iPhone XS sales, as well as weaker than expected iPhone XR preorders,” Zhang wrote. (He also issued a warning about Samsung suppliers amid concerns about the company losing share to Chinese companies.)

Apple may also mention—or be asked about—a Bloomberg report that malicious hardware chips linked to Chinese espionage found their way into Apple hardware. Apple has flatly denied the report, saying there is “no truth” to the claims.

Meanwhile, Apple is linked with broader questions about the health of China’s economy. Some watchers believe that market could boost the company: Wedbush’s Rose, for example, estimates that as many as 70 million Chinese iPhones could be poised for upgrades over the next 12 months.

“The underlying growth opportunity out of this region is massive,” he wrote. And UBS analyst Timothy Arcuri believes fiscal 2019 iPhone unit sales could grow 2%; FactSet expects numbers closer to flat.

“iPhone XS and XS Max interest is higher in Hong Kong compared with iPhone 8, which supports our view that China would be less of a drag and could see some growth,” Arcuri wrote Monday.

But Bank of America Merrill Lynch analyst Wamsi Mohancited concerns about slowing growth there on Monday, noting currency fluctuations that could make iPhones more expensive to buy in China.

It’s “hard to believe that the weaker [Chinese] consumer environment, should it persist, is going to be helpful to Apple,” Goldman Sachs’ Rod Hall wrote last week.

Apple stock are still about 13% below Wall Street’s average price target, suggesting room for more than $130 billion in new market cap, and optimism that it can weather the possibility of a storm.

“Among ‘mega’ cap technology stocks, Apple in our view remains a strong value pick, with the lowest price-to-earnings, and one of the lowest price-to-earnings growth, ratios,” JP Morgan’s Samik Chatterjee wrote Monday, “positioning it well to outperform if macro growth concerns continue to challenge the broader market.”

The market needs it to.

Email David Marino-Nachison at david.marino-nachison@barrons.com. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.

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