Apple’s Q2: Another shoe to drop

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From friend-of-the-blog (and occasional Forbes contributor) Chuck Jones: Apple’s March Quarter Guidance Is More Likely To Disappoint Than Bring Relief:

The average sell-side analyst revenue estimate for the March quarter [according to Thomson Reuters] is now at $59.3 billion and EPS is $2.65. I believe most analysts are expecting gross margin guidance to be a range of 38.0% to 38.5%, which is what it has been for the past five quarters.

However, there can be a difference between the published Street estimates and what investors are expecting. The reasons for this include Street estimates lagging expectations as sell-side analysts don’t want to change their estimates when there is an upcoming earnings announcement and historically sell-side analysts don’t cut deep enough or raise projections enough when there is a significant announcement, while investors are more willing to get in front of conditions getting worse or better.

Revenues typically decline over 30% from the December to March quarters… Over the past three years Apple’s revenue has declined over 30% from the December to March quarters. It was four years ago that the decline was less than that (22.2%), but that was when the iPhone 6 and 6 Plus were not able to satisfy demand in the December 2014 quarter.

Previous December quarter to March quarter revenue declines:

  • December 2014 to March 2015: Down 22.2%
  • December 2015 to March 2016: Down 33.4%
  • December 2016 to March 2017: Down 32.5%
  • December 2017 to March 2018: Down 30.8%
  • Average of the past three years: Down 32.2%

The average Apple’s March quarter revenue is $59.3 billion, which would be a decline of 29.4% from $84 billion. While this would still be a substantial drop, given the demand issues the company is facing it feels like this won’t be enough. To match the 32.2% average decline of the past three years revenue would come in at $56.95 billion, which would be lower than what I believe most investors are expecting…

This may turn out to be a situation where what a company announces is disappointing on the surface but the stock reacts positively. However, I believe that the type of shortfall Apple experienced in the December quarter is not a one-time event and usually there is another shoe to drop.

My take: The Apple 3.0 consensus (see below) implies a 29.6% quarter-to-quarter drop, which is in the historical ballpark.

consensus Q2 2019