Trading Apple Ahead Of Earnings

Apple (AAPL) is set to report second-quarter earnings this coming Tuesday. The drop in demand for the iPhone business will hit the quarter hard. The forecast for the next few quarters might come in weaker than expected as well. The good news is that the company has its services business to fall back on.

Demand Drop

Being that the iPhone is still the main product for Apple, it will be the most important unit to be watched on the May 2 earnings report. The problem is that analysts are anticipating a weak quarter. There is a belief that iPhone demand will be lower than normal.

The reason being is that the new iPhone 8 is expected to launch by fall or September this year. That means that there would be no need to upgrade to the iPhone 7 Plus now with the new phone approaching a few quarters from now. Most notably there are two analysts that expect the quarter to come in weaker than expected.

Analysts from J.P. Morgan and UBS see earnings weakness for the second quarter. Both analysts are even calling for weakness in the upcoming third quarter earnings report as well. J.P. Morgan analyst Rod Hall expects Apple to reveal its June forecast to come in at $1.53 earnings per share on revenue of $44.2 billion. Analysts are expecting the 3rd quarter to come in at $1.63 earnings per share on revenue of $ 45.7 billion.

Both the second and third quarter will be weak as consumers wait for the newer iPhone 8. It would be wise to trade Apple with put options for both the upcoming second and third quarter earnings. The only time to use call options would be when the fourth quarter approaches. That is because the quarter will involve some sales for the iPhone 8.

Fall Back Plan

With Apple’s iPhone business having near flat growth compared to a few years ago, something has to take its place. That is something that Apple has delivered upon greatly. That is because it has been able to make its “services” category a clear cut winner in boosting earnings.

Such services like Apple Music and others have produced $24 billion in revenue for Apple last year. The CEO, Tim Cook, mentioned that services is an important part of the company’s revenue. That is because it is recurring revenue. The good part about recurring revenue is that it is safe.

It is not guaranteed per se, but it is a lot safer than hardware products in terms of consistent revenue. A Credit Suisse analyst, by the name of Kulbinder Garcha, states that services revenue will account for 33% of Apple’s gross profit in a couple of years. That means that by 2020 service revenues could reach to $52 billion.

Cash Reserve

There is one key positive aspect about Apple that should lift the stock higher. For instance, the company has more than $246 billion in cash in its coffers. It can do a lot of things with that much cash. Some things would be to make an acquisition or improve R&D spending.

It’s just that the cash provides so many opportunities that can help the stock from tanking. Matter of fact, the positive cash flow allows Apple to do two different things. First, the company has announced that it increased its buyback program from $140 billion to $175 billion. It also plans to increase the quarterly dividend to 57 cents a share.

What Binary Options Traders Should Watch For

There are a few things that traders should watch for.

The first of which is how the iPhone demand plays out in the upcoming earnings report. It will be important to see how many iPhones are sold during the quarter compared to expectations. This report will show whether or not demand remains strong in the face of the new iPhone 8 release.

The second item would be the services category. Many analysts are pinning the services segment of the business to drive Apple going forward. It will be crucial to see how the metric performed this quarter compared to the last. That will likely indicate how the rest of the year will play out.

The final item that traders should keep an eye on would be how Apple uses its cash reserves. It will be important to see if the company makes a large acquisition that will put it ahead of competitors.