Apple Shares Fall on Concerns Over Near-Term Outlook, Particularly from China

Witawat (Ed) Wijaranakula, Ph.D.
Wed Jul 29, 2015

Apple [NASDAQ:AAPL] shares tumbled 4.23% to close at $125.22 a share on July 22 after the company reported revenues and earnings that beat Wall Street’s expectations, but sales of iPhones came in below estimates. Apple also gave their revenue forecast for its fiscal fourth quarter 2015 that was below consensus estimates. In the press release, Apple CEO Tim Cook said, “We had an amazing quarter, with iPhone revenue up 59% over last year, strong sales of Mac, all-time record revenue from services, driven by the App Store, and a great start for Apple Watch,” 

In the fiscal third quarter ended June 2015, Apple reported total revenues of $49.6 billion, up 32.5% year-over-year and net profit of $10.7 billion, or EPS of $1.85, up 44.5% year-over-year. Wall Street was expecting earnings of $1.81 per share on revenue of $49.4 billion. International sales accounted for 64% of the quarter’s revenue. Sales in Greater China, China plus Hong Kong and Taiwan, grew 112% year-over-year to $13.2 billion, or 26.6% of the quarter’s revenue. 

Apple sold a total of 47.5 million iPhones last quarter, up 34.9% from the same period a year ago. A total of 10.9 million iPads were sold last quarter, down 18% year-over-year. Analysts were expecting iPhone and iPad sales of 49.4 and 10.7 million units, respectively. iPad sales have been in a steady decline and are being offset by iPhone sales. Tim Cook explained that iPhone sales were below market expectations due in part to the reduction of iPhone inventory by 600,000 units during the quarter, meaning they would have sold those iPhones if the phones had been in the channel.

Apple sold 4.8 million Macs in the third quarter, up from 4.4 million a year ago, which was in line with analysts’ expectations. Revenue from "other products", which includes iPods and Apple Watches, grew 49% from the previous year to $2.64 billion. 

Tim Cook said during the company’s earnings call that Apple Watch sales beat the company's own internal projections and that they exceeded the unit sales of the first iPhone and iPad in comparable launch periods. According to CNET, Piper Jaffray analyst Gene Munster revised his forecast for Apple Watches after the earnings call to 2.5 million from 3 million, which he called "in line with investor expectations". Most analysts expected about 4 million units.

From our technical viewpoint, the AAPL ascending triangle chart pattern emerged in February with the head resistance at around the $133 a share level. The stock price has been volatile since mid-June, as concerns about Apple’s business in China were raised. After the earnings report, the stock is trading near the bottom trendline supports. There is a downside risk that AAPL could drop to between the $115 and $105 levels, if the stock breaks down through the 200-day SMA.

Sell-side analysts base their thesis on the argument that Apple iPhone sales in China could be at risk as China’s consumer sentiment will be dragged down along with the Shanghai composite index, while the index continues to pull back sharply from its high in early-June. Millions of small investors who bet on China’s stock markets are now losing real money and could shy away from expensive items, such as iPhones.

According to the Westpac MNI China Consumer Sentiment Indicator just released this week, there is no sign yet of China’s stock meltdown on consumer sentiment, as the index rose 1.9% to 114.5 in July, or roughly at the level recorded a year ago, before concerns about the housing market and the economy began to surface.

Disclosure: Long Position in AAPL.

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