Apple’s Q3 Earnings: AI in Focus as iPhone Sales Remain Key
Apple’s third quarter earnings call, scheduled for July 26th, won’t just be about the company’s traditionally slowest quarter by sales. Investors are keenly focused on what Apple will share about its upcoming September quarter, a period expected to be significantly stronger, especially with the release of new iPhone models. While sales expectations for Q3 are modest, the real focus is on the potential for a robust holiday season fueled by Apple Intelligence, the company’s much-anticipated AI platform.
Key Takeaways:
- Strong September Quarter Expected: Despite Q3 being the slowest, analysts expect a strong September quarter, highlighted by the launch of new iPhones.
- Apple Intelligence Takes Center Stage: Investors are eager to hear how Apple plans to leverage its custom AI chips to power Apple Intelligence, a potential driver of late-cycle demand for high-end iPhone models.
- Capital Expenditures Under Scrutiny: Apple’s strategy of using its own chips in servers for AI, rather than relying on cloud computing, has analysts watching capital expenditure trends to see how the company is pacing with its AI ambitions.
- China Performance Remains a Concern: Although aggressive promotions helped boost iPhone sales during the 618 shopping festival, Apple’s China performance remains a concern, with market share potentially declining in the face of growing competition from native brands.
A Look at the Numbers
Analysts expect Apple to report earnings per share of $1.35 and revenue of $84.53 billion for the third quarter. The real focus, however, is on Q4 revenue guidance which is estimated at $93.39 billion, suggesting a significant bump in sales fueled by the new iPhone launch.
- Product Line Expectations: Analysts estimate that iPhone revenue could reach $38.64 billion, followed by Mac revenue at $7.04 billion, iPad revenue at $6.61 billion, Wearables, Home, and Accessories revenue at $7.83 billion, and Services revenue at $24.05 billion.
The AI Focus
While Apple doesn’t provide official guidance, the company provides investors with valuable data points to gauge the September quarter’s performance. This time, the main focus is on Apple Intelligence, the company’s move into the AI arena, which leverages its own chips for both servers and devices.
Barclays analyst Tim Long expects Apple Intelligence could potentially boost late-cycle iPhone demand, particularly for high-end models capable of running the service. The initial preview of Apple Intelligence was released earlier this week, but it’s unlikely to have a significant impact on Apple’s bottom line in the near term.
Capital Expenditures in the Spotlight
Apple’s decision to use its own chips for AI has led to speculation about its capital expenditures, which have been rising rapidly among its competitors as they invest in massive server farms. Analysts are closely monitoring Apple’s spending in this area, as its self-designed chip strategy could offer a more cost-effective approach.
"Edge AI is in very early stages, has lower capex needs, and offers faster monetization potential through consumer hardware upgrades, which we think makes Apple stock particularly attractive," stated Raymond James analyst Srini Pajjuri.
The iPhone Replacement Cycle
JPMorgan analyst Samik Chatterjee anticipates Apple will reassure investors that the upcoming iPhone replacement cycle will result in better-than-expected revenue, thanks in part to Apple Intelligence. Chatterjee raised his price target on Apple stock to $265, maintaining an overweight rating.
"The revenue upside, in turn, drives our expectations for EPS upside, which is likely to lead to consensus revisions for full-year earnings, and partly ease investor concerns around a premium valuation multiple," added Chatterjee.
China Market Performance Under Scrutiny
Apple’s performance in China has become a significant point of concern, as sales declined by 8% year-over-year in the second quarter amidst heightened competition from local brands like Huawei.
Citi analyst Atif Malik noted that despite aggressive promotions during the 618 shopping holiday, which led to improved iPhone sales, market estimates from IDC indicate that Apple’s sales fell while the Android market in China grew.
Beyond the Hype: Key Takeaways
- The September quarter is crucial: The release of new iPhone models and the potential for Apple Intelligence to drive sales are key factors to watch.
- Apple is focused on AI: While the company doesn’t disclose specific guidance, the focus on its own AI chips and the rollout of Apple Intelligence signal a significant shift in strategy.
- Capital expenditure trends bear watching: Apple’s use of its own chips for AI could create a more cost-effective approach, with potential implications for its overall spending.
- China market performance is a concern: Despite efforts to boost sales, Apple faces growing competition from local brands and may see declining market share in China.
Overall, Apple’s Q3 earnings call is expected to be more than a routine report. Investors will be looking for insights into the company’s AI strategy, its plans for the all-important September quarter, and its performance in a dynamic and competitive global marketplace.
