What To Expect From Apple’s Key Product Lines As It Publishes Q2 Results

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Apple (NASDAQ:AAPL) is expected to publish its fiscal Q2 results on Tuesday, May 2. Below we take a look at some of the key trends we will be watching.

We have a $136 price estimate for Apple, which translates into a market cap of about $710 billion. Our price estimate is slightly below the current market price.

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iPhone 7 Will Drive Overall Growth 

Apple has guided for revenues of between $51.5 billion and $53.5 billion for Q2, marking an increase of as much as 6% versus the year-ago period. The iPhone 7, which is seeing stronger than anticipated demand, is likely to be the primary driver of the growth. While shipments of the device are likely to see some improvement, driven by relatively attractive carrier promotions, ASPs are also likely to see an uptick as the demand mix for the larger 7 Plus model – which commands a $120 premium versus the smaller-screen model – is more favorable compared to previous iterations of the iPhone.

Services Should Continue To Expand

Apple’s services business has emerged as the company’s fastest growing segment, driven primarily by the App Store – which is seeing a higher number of paid app purchases per user – as well as increasing subscriptions to the Apple Music streaming music service. This is positive for Apple, as it helps the company improve customer loyalty for its products, while also increasing margins. Apple has indicated that it intends to double its services revenues over the next four years.

Apple Watch Momentum

Apple’s Watch business also appears to be turning a corner, as the company launched the new Series 2 version while cutting pricing on the earlier version of the device. Apple is also emphasizing the fitness aspects of the Watch – offering GPS and water resistance, as it looks to create more realistic use-cases for the device. During the holiday quarter, the device apparently saw its best ever sales of about 4.6 million units, per IDC, up from 4.1 million a year ago. While Apple does not disclose Watch shipments numbers, we will be looking for commentary on the device’s performance this quarter.

New Launches Could Aid iPad And Mac Businesses 

Apple’s Mac business is likely to see some growth on a year-over-year basis, as the firm upgraded its flagship Macbook Pro laptops late last year. IDC estimates that Apple shipped about 4.2 million Macs during fiscal Q2, marking a 4% increase on a year-over-year basis. ASPs could also trend higher, as the new computers have seen a price hike across the board.  Apple also unveiled a cheaper iPad late last quarter to replace the aging iPad Air 2 tablet.  The new device will have a starting price of $329, marking Apple’s lowest price point for an iPad with a 9.7-inch display. While the device could help Apple increase iPad shipments for the quarter, there is a possibility that ASPs could decline, amid cannibalization of the more profitable iPad Pro tablets (related: Why Apple Is Going Downmarket With Its New iPad).

Gross Margins In Focus

Apple has guided for gross margins between 38% and 39% for Q2, marking a decline on a year-over-year basis. While Apple does have a track record of beating margins guidance, its gross margins have been seeing some pressure of late. This is partly 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. However, there could be a slight improvement sequentially, as yield rates on the new iPhone improve and also as services account for an increasing mix of the company’s sales.

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