When Apple (NASDAQ: AAPL) reports earnings for its fiscal second quarter of 2017 on May 2, one of the metrics investors should watch closely is the tech giant's guidance for its third quarter. After a year-over-year decline in fiscal 2016, Apple's guidance for its third quarter will help give investors an indication of whether the company's recent return to revenue growth was temporary, or part of a sustainable trend.
Continue Reading Below
A return to growth
In Apple's fiscal 2016, the company reported three quarters in a row of year-over-year revenue declines. The poor streak meant Apple's total revenue for the fiscal year was down about 8% year over year, marking a sudden and significant decline compared to Apple's 28% jump in revenue in fiscal 2015.
Given this bleak performance for Apple's revenue in fiscal 2016, it's worthwhile for investors to keep an eye on the company's ability to grow its top line today. Sure, Apple has returned to growth recently. But the company has only increased its revenue year over year for a single quarter so far. Further, revenue growth during this quarter of growth was in the low single digits.
Notably, this return to growth is about to look a bit better if everything went according to Apple's plan during its second quarter. Apple guided for second-quarter revenue of $51.5 billion to $53.5 billion, up 1.8% to 5.7%, from revenue of $50.6 billion in Apple's second quarter of fiscal 2016. Given how reliable Apple's guidance has been in past quarters, the company should meet or exceed this guidance.
Can Apple grow revenue again?
Despite expected growth in Apple's second quarter, investors will likely be looking for more evidence of a sustainable return to growth -- evidence that could come from Apple's guidance for its fiscal third quarter. If the company can grow revenue for three quarters in a row during 2017, a return to growth for the full year is likely.
When Apple reports its guidance for fiscal Q3, the number to beat will be $42.4 billion -- Apple's revenue in the third quarter of fiscal 2016.
Image source: Apple.
Expectations are low, but not as low as they were
While guidance for yet another quarter of revenue growth would be nice when Apple reports earnings on May 2, investors should also keep in mind that Apple doesn't necessarily need any significant growth in the near term. Thanks to the stock's reasonable valuation of 17 times earnings, investors aren't pricing in the double-digit revenue growth Apple regularly reported in past years. This means Apple can handle occasional short-term pullbacks in revenue as long as the top line is growing over the long haul.
On the other hand, while quarter-to-quarter variations between revenue declines and growth are acceptable with a valuation like this, investors should still look for revenue growth to generally trend upward at a low single-digit rate over the long haul. After all, with Apple stock's 30% rise in the past year, the stock no longer trades at the ridiculously undervalued price-to-earnings ratio of about 12 that it did a year ago.
Guidance for another quarter of growth, while not necessary to continue making Apple stock look compelling at its current valuation, would certainly help reaffirm the stock's long-term potential.
10 stocks we like better than AppleWhen 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 April 3, 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 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.