Apple (AAPL), which reports fiscal 2020 first quarter earnings today after the close, has declined somewhat from its all-time highs in the last couple of sessions, but the stock is still up by around 100% since its profits warning a year ago. Over that time we have seen a massive rerating in the stock despite fears iPhone sales are not going to be what they once were. This is largely down to one thing – Services. But there is also a sense that iPhone sales are going to be materially higher than feared a year ago, and with the 5G refresh cycle promising to be a super-cycle, there is plenty of fundamental support for shares to be trading where they are.

Fiscal Q1 earnings per share are expected at $4.55, from $4.18 a year before, on revenues of $88.4bn, from $88.3bn a year ago. 

At the time of its Q4 19 release, Apple guided revenue to be between $85.5 billion and $89.5 billion, with gross margin between 37.5% and 38.5%. 

Momentum coming into this quarter is positive – Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.   

On a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from around 11 last year. The Services-led re-rating may have already happened, although there could yet be a little more upside. 

Q1 Key themes 

Coronavirus/China – investors will pay close attention to what management have to say about the impact of the virus on demand in China, as well as on operations/production. Apple may have to revise its Q2 forecasts for Greater China lower – this could be an important steer for the broader market in terms of the outbreak’s impact.  Most of Apple’s products are made in China, while the country accounts for about 16% of global revenues. Chinese exposure has the potential to dent the stock whatever the Q1 earnings turn out to be if the guidance is soft.

Services/Apple TV+ 

We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. Services is accounting for an increasingly large chunk of earnings, supportive of the recent multiple expansion. However we may see margins hit by content creation investment with Apple TV+ – investors will be keen to hear how this service has performed on launch. Services growth has pulled back a touch in recent quarters and could further slow.

iPhone sales matter a lot less 

The fiscal first quarter is always Apple’s strongest as it chalks up the holiday season and new iPhone models. But sales are less important than in the past. We’ll be looking for any guidance from management on the year ahead and, crucially, the potential super-cycle 5G refresh when it happens. Apple’s first 5G phones are due this year, although there is talk of delays to get the fastest devices to market, so any guidance on this will be key.

The improvement on both top and bottom line in the fiscal fourth quarter came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive. Indeed for 2019 as a whole, iPhone sales fell 14% but the stock was up 89%.  

Wearables  

Apple has been increasingly talking up its Wearables business as this has been a particularly strong performer. Wearables, Home and Accessories knocked it out the park in Q4, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%.  

American consumers

Q4 confirmed that the US consumer remains strong. Indeed, almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell.  We will look to the holiday quarter to see whether international demand is improving again.

Holiday quarter could be record breaking  

Guidance for the fiscal first quarter was bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion. Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region.   

Stock overbought 

The stock has run up quite a head of steam to top $320 before pulling back a touch. We noted on Jan 8^th a potential topping pattern on the chart as it fails to make new highs and the 14-day RSI indicating overbought conditions, while noting that MACD could also be turning.  Indeed since then we have seen the daily MACD turn lower below the signal line and the RSI divergence played out with a pullback last week and into this week. On a weekly chart, the RSI and MACD show the stock is hyper-extended and trading well north of its long-term moving averages. Further pullbacks could occur if the earnings are not least in line with expectations.