‘Valuation leaves little room for error’: Here’s what 4 Wall Street banks expect from Apple’s fiscal 4th-quarter earnings report

• Apple is set to report fiscal fourth-quarter results on Thursday, cluing investors in on how the company performed just before its latest iPhone event.
• The quarter that ended in September saw Apple introduce new services and update its watch and iPad lineups.
• The reveal of its first 5G-capable iPhone lineup arrived later than usual, and while iPhone 12 sales won’t show up in Thursday’s report, commentary on iPhone demand will be closely monitored.
• Here’s what four major banks expect from Apple’s fiscal fourth-quarter earnings.
• Watch Apple trade live here.

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Apple is slated to report fiscal fourth-quarter earnings on Thursday afternoon, but it’s current-quarter commentary that Wall Street is set to watch closely.

The three-month period that ended in September saw the tech titan unveil new services, updated watches, and a new iPad lineup. Most analysts expect Apple’s prior-quarter results to land largely in line with estimates, with little hope for a rally from its already lofty valuation.

Instead, all eyes will be on the company’s potential guidance and earnings call. Apple rolled out its first 5G-capable iPhone lineup earlier in October, marking one of its latest fall iPhone reveals yet. Sales of the new handsets won’t show up in Thursday’s report, but with Wall Street holding high expectations for the iPhone 12, any commentary on sales momentum will be closely monitored.

Here’s what four major banks expect from Apple’s fiscal fourth-quarter report, from iPhone demand commentary to steady Services growth.

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UBS: ‘Shares are likely to remain range-bound’

Analysts led by David Vogt expect Apple’s report to contain few fourth-quarter surprises. The tech giant’s revenue and profit will land slightly above estimates, and its current share price has already priced in such on-par performance, UBS said.

Moreover, history suggests a rosy earnings report will still give way to mediocre near-term performance. The company’s fiscal third-quarter results typically coincide with the unveiling of new iPhones. Investors tend to anticipate the product launch and drive shares higher in the three months ahead of September earnings. Yet the following three months see shares underperform the S&P 500 by 3% on average, according to the analysts.

When coupled with Apple’s already lofty valuation, an earnings beat is unlikely to buck precedent and pull shares much higher, UBS said.

“We believe the shares are likely to remain range-bound until investors gain clarity on the initial success of the iPhone 12 launch,” the team said, adding that investors will reserve judgment on the new phones’ success until Apple reports current-quarter earnings.

UBS maintains a “neutral” rating on Apple shares with a price target of $115.

Wedbush: Demand commentary is ‘the main event’

Improving Services revenue should help Apple post a modest earnings beat on Thursday, but iPhone demand will take center stage, according to Wedbush analyst Dan Ives. Still, Apple’s post-earnings analyst call will yield the most important news for those closely watching the stock, he said.

“For investors, the September quarter takes a back seat to the main event which is around gauging the demand growth trajectory for iPhone 12 into the holiday quarter and the rest of 2021,” Ives wrote in a Monday note.

The analyst has long looked forward to the latest iPhone release, as the roughly 350 million iPhone users eligible for upgrades set Apple up for a “once in a decade” launch. Ives expects roughly 80 million iPhones to have been sold during the initial launch period. Should the estimate prove right, the latest iPhone rollout could be the best since the iPhone 6 release in  2014, the analyst added.

Any commentary on demand in China will also play a major role in the stock price’s trajectory, Ives said. The country is a “key ingredient” to Apple’s success, and signs of weakness could stifle iPhone optimism elsewhere.

Wedbush holds an “outperform” rating on Apple shares with a price target of $150.

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Credit Suisse: ‘Valuation leaves little room for error’

Analysts led by Matthew Cabral similarly advised investors to look through fiscal fourth-quarter figures for insight into Apple’s 5G iPhone sales. Some of the new handsets were delayed by about one month compared to past reveals, while other models aren’t set to be released until November.

That timing will skew Apple’s usual seasonality, Credit Suisse said in a Monday note. Revenue will land modestly below fiscal fourth-quarter estimates and, in turn, lead the current quarter to play a larger role in Apple’s full-year results.

Supply-chain data and order wait times suggest the iPhone launch is off to a good start, but the team remains guarded on whether earnings will lift shares much higher. Limited 5G coverage around the world and the lack of a “robust 5G app ecosystem” may keep some users from upgrading to the new generation, the analysts said.

With shares trading at a 38% premium to the S&P 500 at the time of the note’s publication, “valuation leaves little room for error” when earnings are revealed, the team added.

Credit Suisse holds a “neutral” rating on Apple shares with a price target of $106.

RBC Capital Markets: ‘SE performance should help bridge the gap’

RBC expects Apple to report earnings and revenue only slightly below consensus estimates and, like most other banks, is more interested in executive commentary on the iPhone 12’s sales.

Market share data cited in the bank’s Monday note shows Apple’s dominance gaining 3.3 percentage points from the year-ago period. The boost was likely fueled by the company’s lower-cost iPhone SE, and may allay concerns of weakness in the recent quarter, according to the bank.

“While we expect SE performance should help bridge the gap between the last 4G lineup and the new 5G cycle launched this month, we expect comments on the new product launch to be the key focus area,” the team led by Robert Muller said.

The SE bridge should give way to strong iPhone sales in Apple’s first fiscal quarter of 2021. The bank’s Apple survey suggests reception toward the new phones is encouraging so far.

Additionally, 36% of customers are on Apple’s annual upgrade program, and another 25% plan to join. The data signals Apple could shrink iPhone holding times in the near future, the analysts said.

RBC maintains an “outperform” rating for Apple shares with a price target of $132.

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