We expect Apple, Inc. AAPL to beat expectations when it reports second-quarter fiscal 2015 results on Apr 27. Last quarter, it posted 17.69% positive earnings surprise. It is noteworthy that Apple has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive surprise of 11.39%.
Why a Likely Positive Surprise?
Our proven model shows that Apple is likely to beat earnings because it has the right combination of two key ingredients. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. As a result, the combination of Apple’s Zacks Rank #2 (Buy) and positive Earnings ESP of 1.38% makes us very confident in looking for a positive earnings beat this quarter.
Estimate Revisions Remain Encouraging
Apple has seen positive estimate revisions over both the last 7 as well as 30 days. Over the last 7 days, the company witnessed 1 and 2 positive estimate revisions for the second quarter and fiscal 2015, respectively.
A similar trend followed over last 30 days with 3 and 5 positive estimate revisions, respectively, for the second quarter and fiscal 2015. Notably, there was no negative estimate revision over either of the time frames, which indicates a positive market sentiment.
Factors at Play
We believe that strong sales of the new iPhones (6 and 6 plus) remain Apple’s key growth catalyst for the second quarter and beyond. Since their release in September, the latest iPhones have gained from the pent-up demand. The company sold nearly 74 million units in fiscal first-quarter 2015, representing stiff competition for Google’s GOOGL Android devices.
Further, the launch of the new iPhones broadened Apple’s base in the Far East. The company currently boasts more than 50% share of the Japanese smartphone market. It has also successfully expanded its market share in South Korea, a market where local player Samsung has thus far reigned supreme.
Apple also did extremely well in China, which has a number of strong local players. This helped the company boost its market share to 12% in the region. Apple believes that China, the second largest iPhone market, is set to become a major contributor to its total revenue, going ahead.
Hence, the iPhone maker intends to increase the number of stores in China to 40 by mid-2016. We believe that iPhone sales will continue to benefit from the partnership between Apple and China Mobile in the Greater China region despite reduction in subsidies. Moreover, expanding the carrier base in other countries will significantly boost iPhone sales, going forward.
Another major event that is likely to impact Apple’s second-quarter earnings is the release of Apple Watch. Starting at $349 for the entry-level Sport model, Apple Watch is expected to significantly add to the top line.
However, reports suggest that the company is unlikely to release much about sales data on the Watch so as not to reveal much information to competitors at this nascent stage. According to reports, Apple is most likely to restructure its financial reporting and Apple Watch will be reported under the Other Products segment, which includes iPod, Apple TV and accessories.
It is expected that the company is most likely to draw 60% profit margin from this new product given its lower manufacturing cost, making it the most profitable product for Apple. According to reports, Apple Watch is likely to garner around $2 billion in revenues from initial sales.
Apart from this, other revenue drivers to look forward to this quarter include sales from iTunes, the App Store, Apple Pay as well as Apple’s software and services businesses. Further, its collaboration with IBM Corp. IBM, integrating IBM’s Big Data and analytics capabilities with iPhone and iPad for business customers are likely to be accretive to the second quarter and beyond.
Stock to Consider
Another company that according to our model has the right combination of elements to post an earnings beat this quarter is Groupon, Inc. GRPN has an Earnings ESP of +50.00% and a Zacks Rank #1 (Strong Buy).
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