* Reports Q3 2019 results on Tuesday, July 30, after the close
* Revenue expectation: $53.35B
* EPS expectation: $2.09
When Apple (NASDAQ:AAPL) reports 3Q earnings on Tuesday, there's one big question that investors want an answer to: how deep is the slowdown in iPhone sales?
iPhones, which make up more than half of Apple’s revenue, are crucial for the company’s future growth, at least in the short-to-medium term. In the past quarter, Apple reported that its sales in the fiscal second quarter dropped 5% from a year earlier, driven by a 17% slide in iPhone sales.
Despite this setback, investors still sent Apple’s shares higher, mainly because that dip in sales wasn’t as bad as the market was expecting. Apple stock price has climbed 33% this year, closing yesterday's session down 0.8% at $207.02.
But that better-than-expected performance shouldn’t disguise the fact that the problems that the CEO Tim Cook highlighted in his January letter to investors are still very much there. China, at the heart of Apple’s sales weakness, is still a big threat as its economy struggles from the effects of the lingering trade dispute with the U.S.
And the outcome of the U.S. and China trade negotiations is still very much anyone's guess. The dispute adds many more risks to the maker of iPhones’ future growth. The biggest among them is the disruption of the company’s massive supply-chain system in China — a comprehensive network of low-cost suppliers — if the two countries fail to resolve their differences.
Another Layer of Uncertainty
Adding to these woes is the latest announcement by the Justice Department that it is opening a new, broad antitrust review of the world’s largest tech companies, including Apple, Amazon.com (NASDAQ:AMZN), and Facebook (NASDAQ:FB). Though it’s extremely difficult to predict any particular outcome from this new probe, it is clear that it adds another layer of uncertainty to these companies’ outlook and will potentially act as a drag on their share prices.
These challenges aren’t small by any standard and may continue to produce boom-and-bust cycles for Apple stock in the short-run. But, in our view, the company has all it takes to emerge a winner in the long-run.
Apple is succeeding in its plan to revive its sales growth and diversify its revenue away from iPhones. The company’s services, which include Apple Music, movie rentals and app downloads, produced 33% growth last year with sales touching $40 billion—accounting for about 15% of the company’s total of $265.6 billion.
That contribution will definitely accelerate once the company’s new line of services—- video-streaming, Apple Pay and gaming — start to chip in. According to an estimate by Morgan Stanley) services will continue to grow and could generate about 60% of Apple’s revenue in the next five years.
Bottom Line
There's a good chance that the Q3 earnings report could disappoint Apple bulls due to the headwinds the company faces in the current uncertain economic environment. But any dip in Apple shares, in our view, should be taken as a buying opportunity, given the company’s strong global brand, cash position, and its push to diversify its revenue.