Apple's upcoming earnings report is set within a tumultuous market. We find ourselves in a changing environment with fears surrounding China's economy subsiding and optimism around the U.S. economy and the technology sector on the rise. Last week, large cap tech saw a resurgence as Microsoft, Amazon, and Google all reported strong 4Q earnings compared to expectations. Apple shares have traded up since bottoming at the end of August even though Wall Street continues to question iPhone sales strength. Apple's 4Q15 will provide the clearest read yet on how the global economy did this past summer as the iPhone has become the unofficial economic bellwether for China and global consumer demand.
The following table includes my estimates for Apple's 4Q15. Where applicable, I have compared my estimates to management's guidance.
Investors remain nervous about iPhone sales. Upon closer examination, this nervousness has been around for close to a year, dating back to when the iPhone 6 and 6 Plus launched in September 2014. Since Apple's 4Q15 earnings reflect iPhones sales from July to September, results will primarily reflect how the iPhone 6 and 6 Plus did in China over the summer. In many ways, Apple's 4Q15 is a transitory quarter as attention will quickly move to FY2016 and iPhone 6s and 6s Plus demand.
Exhibit 1: iPhone Unit Sales Expectation Meter (4Q15)
I remain above consensus with my 50.5M iPhone unit sales estimate. Much of my optimistic stance rests on the belief that Apple saw continued robust iPhone sales in Greater China over the summer. I am also assuming Apple experienced an average level of iPhone sales seasonality in the weeks leading up the the new iPhone launch. I consider iPhone unit sales in the range of 46M to 51M as close to my expectations. If Apple reports iPhone unit sales of closer to 40 million units, I will need to readjust my FY2016 iPhone sales view as it is likely Apple saw decelerating iPhone unit sales growth in China at a much faster pace that I expected.
iPad and Mac
Similar to the past few quarters, the iPad and Mac will not make or break Apple's earnings report. When taking a step back from the quarterly fluctuations, Apple is still trying to find the iPad's normalized sales run rate where the pace of iPad upgraders and new customers will lead to stable growth trends. We are not there yet. The Mac continues to perform well in an environment where the laptop and desktop form factors are struggling in the face of smartphones.
Exhibit 2: iPad and Mac Unit Sales Expectation Meters (4Q15)
As we saw with Apple's 3Q15 earnings report, due to Apple not disclosing Apple Watch sales estimates, we end up with an "inside baseball" back-and-forth debate among financial analysts trying to back into Apple Watch sales estimates. Consensus seems to have settled on Apple selling 2.5 million to 3.5 million Apple Watches last quarter (I estimated Apple sold 2.6 million). At last week's WSJDLive conference, Tim Cook all but assured us that Apple will have shipped more than 2.5 million Apple Watches in 4Q15. My official Apple Watch unit sales estimate is 3 million, bringing the five month total for Apple Watch unit sales to 5.6 million.
Management's guidance will provide a clue as to how iPhone 6 and 6s Plus are selling. Unfortunately, Apple Watch revenue may make it more difficult to convert revenue guidance into an iPhone unit sales estimate. The debate surrounding iPhone is whether Apple can continue to grow the product category in FY2016. If revenue guidance comes in less than $75 billion, many investors will use that as evidence that Apple will struggle growing iPhone unit sales in 2016.
Exhibit 3: Revenue and Margin Guidance Expectation Meters (for 1Q16)
Expectations surrounding Apple are much more varied heading into Tuesday's earnings report. With iPhone sales expectations more subdued this time around compared to previous quarters, it may take less for Apple to please Wall Street. I will be looking for any signs as to how management looks at the pace in bringing new customers to iPhone. While a slowdown in new user acquisition from FY2015 should be expected, the market will likely look favorably upon evidence that suggests the iPhone 6s and 6s Plus are still effective in expanding the iPhone user base at levels similar to iPhone 6 and 6 Plus. Several analysts have already given up on the iPhone 6s and 6s Plus narrative and are now focusing on iPhone 7 in late 2016.
For additional commentary and perspective on Apple's upcoming earnings, become a member to receive my last few emails (October 20th, 21st, 22nd, 26th). Members will receive my complete earnings reaction following Apple's earnings release. To receive these emails and future daily emails containing Apple analysis (10-12 stories per week), sign up here.