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Apple's revenue will continue to shrink, so why stocks are there?



Apple Inc. registered a sharp drop in revenue for their vacation. It was no surprise. What follows can be. The company releases a weaker-than-expected sales forecast for the current quarter, which suggests that the iPhone's sales slowdown could lead to significant reductions in revenue that is moving forward.

Analysts are already expecting a revenue drop for each quarter of the current financial year before Apple

-1.04%

published their forecast for March-quarter on Tuesday, calling for revenues of 55 billion dollars to 59 billion dollars for the quarter, compared with the FactSet consensus of about 59 billion The dollar and the total of the previous year of 61

.1 billion dollars. This type of decline in sales usually does not lead to higher share growth, but Apple shares have increased with more than 5% in trade hours, leaving one question: Why?

Wedbush analyst Daniel Ives cites three reasons in a telephone conversation Tuesday afternoon, starting with the earnings forecast. Although it has come under the consensus expectations of analysts, Ivs said it is still higher than the fear of the market.

"They were afraid that they could get a $ 55 billion figure," Ivs says. Both factors were related to Apple's business services, which the company highlighted as iPhone sales are stagnating. While revenue from iPhone fell 15% since the last holiday market quarter, software and service revenues increased by more than 19% after normalization of the change in revenue recognition rules. Ives mentioned two specific Apple service announcements: the gross profit margin and the number of subscribers who pay for subscriptions.

See also: How China's Deterioration in World Economic Growth Can Hardly Affect

The Gross Margin for Service Business was offered by Peace offered by Apple while consuming single product sales like the iPhone, we measured an indicator that would not look good for Apple for the one it does. Apple said its gross earnings for services such as Apple Music, iCloud and Apple Pay were 63% in the quarter, which according to Ives is better than expected.

"The sand line has a 60% gross margin," said the analyst. , which performs better than Apple shares at $ 200. "The service business may have been something [investors] that underestimated how profitable it is."

Ives compared it to Amazon.com Inc.

AMZN, -2.69%

broke the performance of its cloud computing division, which also offered a glance at a higher margin business that was blurred by much larger core business with lower margins .

"When Amazon exploded AWS margins, it was a milestone for Amazon, because investors began to give them more credit," he said. For more: Amazon's revenue growth engine has nothing to do with e-commerce

The type of revenue that Apple collects through these companies is also very important. Ives pointed out the number of paid subscriptions that Apple has as an important disclosure, as it is a recurring revenue source that is more predictable, a key factor for Apple, as iPhone users average wait longer before buying a new phone .

now has over 360 million paid subscriptions in our service portfolio, an increase of 120 million a year earlier, "Finance Director Luca Maestri said on Tuesday. "Considering the constant power and momentum in this part of the business, we now expect the number of paid subscriptions to exceed half a billion in 2020."

BTIG analyst Water Peachkick outlined another figure in Apple's estimate of gross profit. a margin of 37% to 38%, signaling profitability will not decrease along with revenue.

"The good news is that lower earnings guidelines, possibly partly due to price cuts in some markets, do not lead to a poor guide to the gross margin, another relief for investors who are afraid of the worst "Peachchick writes, subtracting 6 billion in 2019. The iPhone sells from its forecast due to poor forecasting. He also shaved his price to $ 189 from $ 197 on Tuesday night

In general, Apple's stock jump at the end of trading on Tuesday felt like a rally as investors got information that was not as bad as was worried about a 27% drop. in the last three months, a period in which the S & P 500 index

SPX, -0.15%

was basically flawless. This type of rally may not last long, however, because it depends entirely on whether Apple will fulfill the promise on Tuesday.

"It is now coming to this guide in March – it is imperative to hit," said Ives, noting the big omission of the initial forecast for a break that required an early warning to Apple. "There is a big problem with confidence in terms of predicting iPhone sales."

Updated with additional comment from analysts.

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