Apple, Inc. Earnings: Why Guidance Is Key

Markets Motley Fool

When Apple (NASDAQ: AAPL) reports its quarterly results this week -- just before the holiday season -- the tech giant's guidance for the upcoming quarter may ultimately be the most important metric for investors to watch. Not only representing the holiday period, but also the period in which sales of the latest iPhones usually gain steam, the company's fiscal first quarter (the fourth calendar quarter) is seasonally its biggest -- by a long shot.

Continue Reading Below

In Apple's first quarter of fiscal 2018, the Mac maker will be up against record quarterly revenue reported in the year-ago quarter after the iPhone 7 was released. The question, therefore, is whether Apple will provide guidance for first-quarter revenue above its top line in the first quarter of fiscal 2017?

Why first-quarter guidance is so important this year

The guidance Apple provides in its fourth-quarter earnings report for its first quarter is arguably more important than usual this year since Apple's launch schedule for its new iPhones follows a much different pattern than usual this time around.

Typically, Apple begins shipping all of its new iPhones before its fourth quarter ends. This year, however, Apple announced both its iPhone 8 and iPhone X in September, but only shipped iPhone 8 before the quarter ended. iPhone X shipments don't begin until Nov. 3 -- more than a month into the holiday quarter. Not only does this leave less time for customers to buy the iPhone X, but the later ship date is also an indicator of the flagship iPhone's limited supply. If Apple were able to ramp up iPhone X production earlier, the company would have shipped the iPhone X alongside the iPhone 8.

Since the iPhone X didn't start shipping until November, Apple may not ramp up iPhone X shipments fast enough to match its production of new iPhones during the holiday quarter in previous years, particularly when compared to Apple's record holiday quarter last year. Indeed, Apple's website currently says that iPhone X units ordered today won't ship for five to six weeks, suggesting production is already running behind demand.

Continue Reading Below

Of course, there are still ways Apple could report a record holiday quarter. First, the iPhone 8 could potentially save the day. Currently, iPhone 8 orders are shipping as early as Thursday, Nov. 2. If there is enough demand for the iPhone 8, this could offset any production shortages from the iPhone X. Second, iPhone X production and shipments could ramp up nicely toward the end of the quarter. Last, Apple's other segments could contribute exceptionally strong growth. Notably, though iPhone represents half of Apple's revenue, other segments are growing faster.

What to look for

Revenue in Apple's first quarter of fiscal 2017 was $78.4 billion, up 2.5% from revenue in the first fiscal quarter of 2016. So, when Apple provides its guidance for first-quarter revenue in its fourth-quarter report, the midpoint of the guidance range will need to be higher than $78.4 billion to imply that management expects growth.

However, for Apple's guidance to meet the market's expectations, the midpoint of Apple's guidance range will need to be about $85 billion, representing year-over-year growth of about 9%. On average, this is what analysts are expecting from Apple's first-quarter revenue. In other words, analysts seem to be betting that between a ramp-up in iPhone X production, sales of the company's September-launched iPhone 8, and growth in other Apple segments, more strong growth is on the way.

Apple will report its first-quarter earnings after market close on Thursday, Nov. 2.

10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.