Apple (NASDAQ:AAPL) is expected to announce its fiscal year Q3 earnings on July 19th. It will be interesting to see if Apple is able to beat its guidance from last quarter’s earnings announcement. Apple generated revenues of $24.7 billion and gross margins above 41% in Q2, and the outlook given by the company for Q3 was $23 billion in revenues and 38% in gross margins. [1] Apple continues to face stiff competition from Google’s (NASDAQ: GOOG) Android operating system in the smartphone market while it dominates the nascent tablet industry as rivals Research in Motion (NASDAQ:RIMM) and Motorola Mobility (NYSE:MMI) struggle to match Apple’s growth.
Our $430 price estimate for Apple stock is about 15% above market price.
Can Apple Beat its Guidance?
Apple continues to strengthen its smartphone market share as it increased its U.S. smartphone market from 25.2% in February to 26.6% in May 2011. [2] The iPhone accounts for more than 50% of our price estimate for Apple stock and so any changes in expectations for iPhone could have a big impact on Apple’s stock value.
Apple also continues to dominate the tablet market with competitors unable to make a noticeable dent in its market share. Despite some success from RIM and Motorola Mobility tablets in the past quarter, neither have the momentum to challenge Apple in the near term.
Gross Margin Expansion
The main reason for Apple announcing a lower gross margin outlook for Q3 was the uncertainty behind the raw material supply chain issues prevailing during the last few quarters due to the Japan tragedy. Although Apple avoided any major hiccups in its supply chain in the last quarter, the reduced visibility probably caused it to guide margins lower for Q3. (see Apple Avoids Hiccups in Supply Chain, Raising Estimates on iPhone Outlook)
A recent report suggests that raw material prices have improved for Apple, which could be a positive for Apple’s profitability. [3] In addition if stresses in the supply chain have reduced, these two factors could support some improvment in its gross margins.
See our complete analysis for Apple stock here
Notes:- Apple FY Q2 2011 earnings conference cal transcript, SeekingAlpha, April 20th, 2011 [↩]
- comScore Reports May 2011 U.S. Mobile Subscriber Market Share, July 5th, 2011 [↩]
- Apple profits to benefit as memory, display pricing improves, AppleInsider quoting Sterne Agee as source, July 6th, 2011 [↩]
