Apple investors made a big bet on a rare and powerful event that's about to pay off or fizzle in the sky

AppleApple CEO Tim Cook.
  • Apple will report its fiscal first-quarter earnings on Thursday.
  • The company is likely to report record quarterly revenue and healthy earnings.
  • But Wall Street is focused on second-quarter guidance, in particular whether the long-awaited iPhone super cycle is still in the offing.

Apple will have a tough act to follow when it reports its earnings on Thursday, the day after a rare super blue blood moon graces the night sky.

Like eager stargazers awaiting the super moon, Apple shareholders are anxious to be dazzled by a long-anticipated “super cycle” of iPhone sales.

They may be disappointed.

In recent weeks, several Wall Street analysts have pointed to a drumbeat of worrisome reports about Apple’s component suppliers that suggest iPhone sales may slump in the first three months of the year.

Blood MoonTom Anderson/Twitter

“Recent datapoints on iPhone sales continue to point to weaker-than-expected demand for the new iPhone models,” Deutsche Bank analysts wrote in a Monday note to clients.

Apple’s stock, which was trading near its 52-week high earlier this month, has come down about 6% over the past two weeks as the worries have mounted.

Apple is expected to post revenue growth of 11% in its recently ended fiscal Q1. But regardless of how strong of a quarter Apple puts in the bag during this past holiday sales season, Wall Street is focused squarely on Apple’s expectations for the coming year – in particular, whether the company’s new three-headed phone lineup compels a stampede of consumers to upgrade their phones and drives a sales bonanza.

Shoot the moon

IPhone X iPhone 8Justin Sullivan/Getty

Many Apple watchers believed that the new iPhone design released in October, the iPhone X, would spur a large group of people holding on to older iPhones to upgrade this year, thus creating a “super cycle.”

But though the iPhone X has been well-received by critics, who praise its gorgeous OLED screen and innovative facial-recognition technology, it’s not clear that it has ignited the passion of consumers.

Part of the issue may be the phone’s $US999 price tag, which makes it the most expensive iPhone that Apple has ever sold.

“Our argument has been that the phones were too expensive to drive massive adoption, consumers are keeping their phones longer because of their high cost, the market is now only a refresh market, and the iPhone X features weren’t enough to drive non-early adopters to buy new phone,” Deutsche Bank analysts wrote in a recent note to investors.

Another worry is that Apple’s offer to replace batteries on older iPhones at a discount, stemming from the “batterygate” scandal, could crimp upgrades by giving customers a cheaper alternative to buying a new phone.

“We don’t think fiscal 2018 will be a ‘supercycle’ year given unit growth of about 10% dependent on China,” the UBS analyst Steve Milunovich said in another note.

Apple will provide revenue guidance for its second fiscal quarter on Thursday. Wall Street analysts predict on average that Apple’s guidance for next quarter will be about $US67.1 billion, but some analysts now go as low as $US60 billion, which would mean that Apple’s iPhone sales could be extremely disappointing.

Apple providing guidance “below $US66 billion likely would result in a stock price decline,” Milunovich said.

Be patient until the 2nd half

Still, many Apple analysts are telling people to hold their Apple shares, especially if the guidance for next quarter is weak.

“We believe if Apple guides to low end of Street whisper numbers, with a strong ASP and three device lineup slated for the next 9 months that the stock will rebound from here,” the GBH Insights analyst Daniel Ives told Business Insider.

He believes Apple could sell 240 million iPhones in 2018 – higher than its record set in 2015.

The KGI Securities analyst Ming-Chi Kuo, who is known for his “Apple Insight” research, wrote earlier in January that the “real super cycle” in Apple wouldn’t happen until the second half of 2018, when a new iPhone product lineup could spur the wave of upgrades investors are hoping for.

Another cause for optimism: The average price for an iPhone could be going up, especially after the $US1,000 iPhone X was released. A higher ASP could show that Apple’s customers are willing to stick with Apple despite higher prices, and it could suggest further upside even if iPhone unit sales stay flat.

‘Cover fire’ for iPhone disappointment

Eddy CueGetty ImagesApple exec Eddy Cue, center, oversees the company’s music efforts.

With so much uncertainty in iPhones, some investors are looking to other corners of Apple’s business for a potential upside surprise.

“The iPhone drives the narrative, but firing on all cylinders in other parts of the business could provide cover fire for any iPhone disappointment,” Milunovich of UBS wrote.

Apple’s service business, which includes revenue from the App Store, Apple Music, and other online services and subscriptions, is increasingly important and could move the needle.

“In our model, we have hardware revs flat post iPhone X,” the Macquarie analyst Ben Schachter wrote on Monday. “And yet we have EPS showing a 13% compound annual growth rate” because of high-margin services and capital return.

“The bottom line is that Services and the app ecosystem will likely be responsible for a significant percentage of Apple’s future profit growth,” he continued.

Another thing that could boost Apple’s stock is if it commits to give a lot of money to shareholders. Increased share buybacks and dividends could provide downside protection for investors, Keybanc analysts wrote in a note. And Apple was a major beneficiary of the recent tax return, though the company hasn’t yet committed to the $US252 billion it can bring back to the US after paying $US38 billion in taxes on it.

Here are the key numbers that Wall Street expects for Apple’s recently ended quarter, via Bloomberg data:

Revenue: $US87.1 billion (Apple itself expects $US84 billion to $US78 billion), which would represent an 11% increase year-over-year

Earnings per share (GAAP): $US3.83

iPhone sales: 80.2 million

Business Insider will be covering Apple’s results live as they cross the wire Thursday.

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