Investors’ Attention Turns to Apple

After an earnings season that has proven dramatic for tech stocks, the attention of investors now turns to Apple, with the iPhone maker set to deliver its own earnings update after U.S. markets close on Tuesday. Facebook, Twitter and Netflix have all seen their share price plunge in recent weeks after markets reacted strongly to the three tech sector peers missing forecasts on growth. Amazon and Alphabet, on the other hand, pleased those investing online in the FAANGs and wider FANG+ index.

The tech sector could do with a pick-me-up from Apple after last week’s 20% and $120 billion plunge in Facebook’s value has dragged other big tech stocks down in the following days. With the target of becoming the world’s first ever trillion-dollar company in sight, Brits investing online in Apple stock will be hoping a set of results that beat forecasts would provide the momentum required to finally reach that landmark. Amazon has again pulled close to Apple and after the former posted record Q2 revenues last week, a misstep now could swing momentum the other way.

Apple faces the challenges of the fact that summer is traditionally a slow period for smartphone and tech sales, particularly with a new iPhone model expected to be launched in September. Trade war tensions with China, which would hit Apple more than any of the other FAANG tech stocks if escalated are also a worry.

So what should investors be paying attention to as Apple’s Q3 results are announced later today? iPhone sales numbers are of course key and are forecast to come in 2% up on last year at 42 million. However, with expensive iPhone X now around 8 months in to its sales cycle, of even more importance will be revenues and average profit per handset. Markets consider improvement here as key to Apple continuing to grow despite smartphone sales numbers being thought to have peaked.

Revenues are forecast for $52.3 billion for the three months up until the end of June but if $52.5 is hit that could provide Apple’s share price with some real momentum. It would mean seven consecutive quarters of accelerating revenue growth.

Outside of gadget sales, investors will be looking for strong growth in revenue from the company’s services unit, that includes the App Store, iTunes and the iCloud. With smartphone sales naturally peaking, increasing revenue derived from services is also a key pillar for future growth. Apple has performed well here over recent quarters and has set a target of $50 billion in revenue a year by 2020. The quarterly revenue is expected to be reported as somewhere around the $9.3 billion mark and, if met or surpassed, will keep the company firmly on track to hit its $50 billion 2020 target.

Bullish forward guidance for the rest of the year will also be looked for with Apple expected to launch three new iPhone models between September and November.

With sentiment towards the tech sector currently so fragile, Apple just matching forecasts may not be enough to prevent a dip in its share price. However, if the company exceeds expectations later today many analysts believe that its market capitalisation could potentially break through the $1 trillion ceiling within a week. Shallow summer liquidity is likely to exaggerate any share price swing either up or down following the posting of results.

A strong set of results could well staunch the current tech sector sell-off and divert a wider malaise for equities. The negative scenario of Apple missing forecasts could, however, add further momentum to what looks like it could prove to be the beginning of a correction that Morgan Stanley has predicted could match February’s downturn.