Apple earnings preview

Better market conditions for the largest tech company in the world could be upset by shutdowns in China, and a less optimistic global growth outlook.

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Harder comparables

When Apple reports its second quarter earnings on Thursday, the comparison will be for the same period in 2021. That's when optimism was finally starting to improve as vaccines were rolling out, and many Americans were still getting stimulus support. Also, that's when the new 5G iPhone reached the broader market.

Meanwhile, the outbreak of the war in Ukraine and the worry of inflation meant that there was comparatively less optimism over the last three months. But, one of Apple's biggest challenges hasn't been demand, but supply, due to the lack of chips. Starting in early March, shutdowns in China forced the company to pair back its production forecasts. Now the question is whether it will cut sales targets or adjust guidance pending the possibility of another shutdown at the main supplier, Foxconn.

What to look out for

Analysts are expecting a seasonal sequential drop in earnings to $1.42/shr, which is just a hair above last year's significant earnings beat. Revenue, however, is expected to have increased sequentially to $94.0B. It should be noted that the consensus among earnings forecasters has been rising lately, hinting that perhaps analysts are worried that they might have underestimated the results (just like last year).

As we just experienced with Netflix, clarity on the total cost of Apple's withdrawal from the Russian market might come as a shock. In the case of Netflix, Russia was brushed off as a small market segment, but it was difference enough to cause a shock loss of subscribers.

The logic is the same for Apple- that Russia is a small piece of the overall pie and unlikely to significantly impact the bottom line. But be mindful of a Netflix-style shock.

Finally, what management has done to ensure supplies should another round of lockdowns in China occur might reassure investors.

APPL gaps down to 200 SMA

Apple’s stock price is not so far from its all-time highs of $184, but it flirts with a bear market confirmation near $160. This is where the 200-day average lies, which has been a constant source of final support at the end of major dips over the past year.

On prior occasions, price would dip under the 50 DMA once or perhaps twice, touch the 200 DMA and rally to new highs. This time the price has dropped under 50 DMA three times and is testing the 200 DMA for a second time without having made new highs inbetween.

Hence, the 200 DMA is the important pivot in the hours before and after results. If it holds, we can look towards a resumption of the uptrend. If it breaks - the next major support is at the October low of $140.

Source: Spreadex trading platform

Key takeaways

The peak of Apple's success was in 2021, when it had just launched the 5G iPhone while much of the world experienced optimistic reports on vaccines. However, the last quarter was low on optimism and risked slightly more inflation due to the war and slowdown in Chinese production. Apple has a habit of handily beating estimates but analysts question whether Apple will adjust targets or guidance.

Traders should look whether Apple reports a sequential drop in earnings, and revenue has increased. Although unlikely to impact Apple's bottom line, the impact of the withdrawal from Russia might be noteworthy, but 'supplies' commentary and how Apple ensure supply will reassure or alarm investors.