Expectations headed into Apple's 3Q16 earnings report are at a multiyear low. I expect Apple to report double-digit unit sales declines in each one of its major hardware categories. In addition, management's guidance will likely portray another quarter of double-digit revenue declines. Apple management has an opportunity to take advantage of low expectations to work on weaving a new Wall Street narrative around the company and stock. In addition, Wall Street is eager to hear management explain many of the moving parts found in the iPhone business.

Exhibit 1: Above Avalon's AAPL 3Q16 Estimates

My full perspective and commentary behind all of my estimates are available in my 3Q16 Earnings Preview available here for Above Avalon members. (Click here for more information on membership).

Apple is expected to report its weakest quarter for iPhone unit sales growth since the iPhone has been launched. Management's guidance implies approximately a 20% year-over-year unit sales decline. There are a number of warning signs appearing in the iPhone business which is making growth much harder to achieve.

Exhibit 2: iPhone Expectation Meter (3Q16)

I expect the iPad and Mac to join the iPhone in terms of double-digit unit sales declines. While the iPad's problems remain structural in nature as the smartphone has impacted the tablet category's ultimate sales trajectory, the Mac is suffering from a lack of hardware updates. This negative development should resolve itself in a few months as Apple is expected to unveil updated Macs at its September hardware keynote.

Exhibit 3: iPad and Mac Expectation Meters (3Q16)

Apple will report a year-over-year decline in Apple Watch sales. My 1.6M Apple Watch unit sales estimate implies a 38% decline from 2Q15 results. While on the surface this may seem like a surprising development, Tim Cook indirectly implied Watch sales would decline year-over-year when comparing the Watch to the iPod. Apple expects to sell approximately 40% of its annual Watch shipments around the holidays.

Exhibit 4: Other Products and Apple Watch Expectation Meters (3Q16)

Management's revenue guidance for 4Q will likely contain a portion of opening weekend sales for new hardware announced at the September keynote. However, the variable that will likely end up playing a larger role for revenue guidance will be any perceived drop off in sales in July and August as customer anticipation builds for new iPhones, Apple Watches, and Macs in September.

Exhibit 5: Revenue and Gross Margin 4Q16 Guidance Expectation Meters

Apple is currently undergoing a significant expectations reset on Wall Street. The company is transitioning from a growth stock to a value stock. One consequence of this current situation is that Wall Street's reaction to Apple earnings may end up surprising many observers. A big bump up will serve as evidence that Apple's transition to a value stock on Wall Street is complete and that the company has begun to be judged by metrics other than iPhone unit sales growth. A drop in share price would reveal that there are still a few large shareholders that need to adjust their positions due to Apple becoming a value stock.

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