Apple Q1 Preview: Will Samsung’s Missteps And Carrier Promos Help Apple Beat Expectations?

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Apple (NASDAQ:AAPL) is expected to publish its Q1 2017 results on January 31, reporting on a quarter that saw the company ramp up production of its latest flagship iPhone 7, introduce new Mac computers and witness record sales at its App store. Below we provide a brief overview of what to expect when Apple publishes earnings.

We have a $127  price estimate for Apple, which is roughly in line with the current market price.

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iPhone 7 And Mac Will Drive Revenue

Apple has guided for revenues between $76 billion and $78 billion for Q1, marking a slight improvement over the year ago period. The iPhone is likely to be the primary driver of the increase, as the company ramps up production of its iPhone 7 models, which remained significantly under-supplied over Q4. Apple is also likely to have capitalized on the setback faced by its high-end smartphone rival Samsung Electronics, which had to discontinue its fire-prone Note 7 smartphone late last year. Carrier promotions on the iPhone 7 have also been much stronger than previous iterations of the handset. While initial launch promos typically offered the iPhone 7 for free to iPhone 6 customers who trade in, offers over the holiday quarter included buy-one-get-one free promotions (related: This Year’s iPhone Promos Are Great For Customers, Costly For Wireless Carriers). ASPs for the iPhone are also likely to improve sequentially, as the demand mix for the larger 7 Plus models, which command a $120 premium, is expected to be significantly stronger compared to previous iterations of iPhone. Apple is also likely to see higher revenue from the Mac product line, which witnessed some upgrades over the last quarter. Per Gartner, Apple’s Mac shipments grew an estimated 2.4% year-over-year to about 7.5 million during the holiday quarter. Mac ASPs are also likely to have trended higher, given that Apple increased the price points for its latest MacBook Pro laptops.

Margins Could Contract On Higher Component Costs, Dollar Appreciation

Apple has guided for gross margins between 38% to 38.5% for Q1 FY’17, marking a decline on a year-over-year basis, although there could be a slight improvement sequentially. This is because the iPhone 7 is reported to be more expensive to build compared to its predecessors, as it sports more advanced components and higher storage capacity (related: Apple’s Flagship iPhone Keeps Getting More Expensive To Build). Moreover, the appreciating U.S. dollar could also hurt Apple’s margins, as over 65% of the company’s revenues come from abroad. The dollar appreciated by over 5% on a trade-weighted basis during the last quarter. However, there could be some positive factors impacting margins as well. Services, which have thicker margins, are likely to account for a rising percentage of the company’s sales mix (13.5% in Q4’16, up from 10% in Q4’15). Apple recently announced that App Store sales grew by roughly 40% in 2016 and there is a possibility that subscriptions for its Apple Music service also expanded over the holidays.

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