Lucky number 8
The approach of ‘iPhone 8’ has fermented the view among investors that Q3 could largely be written off. Instead, the company posted growth in all important metrics and forecast revenues in the current quarter, usually the busiest, would grow faster than all but the most optimistic estimates. A little curiously for a company that for years routinely vaulted expectations, Tuesday night’s announcements seemed to catch the market off guard. The stock surged above prices that pre-earnings options trading was pointing to, rising as much as 6% after-hours, outpacing the 3.6% jump (or fall) implied by straddle deals, which saw higher than average demand in the run-up. The stock also bested the average 4.5% spike seen in the wake of Apple’s last 8 quarterly reports.
More broadly, the Apple 'beat’ could provide the catalyst markets need to finally grab the earnings season by the horns. Despite a generally reassuring set of results from large-cap firms so far, enthusiasm has been palpably missing. A spike in Dow Jones futures shortly after Apple’s quarterly report pointed to a possible new record high above 22,000 when cash market trading gets underway, with potential assistance from a fresh all-time peak in Apple stock too. The share nosed past a recent record in Tuesday night’s extended trading.
When a 10% fall is ‘flat’
Along with selling over 300,000 more handsets than expected, another long-standing pinch point that Wall St watches intently showed the first potential sign of easing in Q3. CFO Luca Maestri said iPhone sales in mainland China were essentially flat in the quarter, leaving total revenues from the country 9.5% lower, a smaller decline than recent quarters. Handset sales weakness was “concentrated in Hong Kong” as dollar-fuelled tourism wanes with the softening dollar (HKD is pegged to the greenback). Although further Apple revenue declines in China are all but certain, as the market matures and diversifies, it was the apparent abatement of the rate of that decline that helped lift sentiment overnight, along with rises in mainland China and Taiwan in sales of other Apple products. Apple also saw 19% growth in emerging markets outside of China, backing the prospect, whatever the true extent, that further frontiers remain.
The ‘moth of AI’
Additionally, Apple chose its post-earnings call as the medium to address in the clearest way yet, the worst-kept product secret in the consumer technology world—that it’s making a “big investment” in ‘autonomous systems’. The term conveniently hints at the aspect of these that has captured the public (and Wall St’s) imagination most. “From our point of view, autonomy is the sort of moth of AI projects”, to quote CEO Tim Cook. "And the autonomous systems can be used in a variety of ways, and a vehicle is only one”. In declining to be drawn any further about the project, which is unlikely to yield customer-ready products for some years yet, the theatrical aspect of the disclosure was at least as clear as the content itself. It did Apple shares (NASDAQ:AAPL) no harm.
Difficult parts
In like fashion, investors signalled they would overlook CFO Maestri’s complaint that the environment for memory chip prices is now “more difficult” than last year, or even 90 days ago. Chip economics are getting trickier for device makers due to various demand factors including the proliferation of cloud usage. DRAM and flash chip price hikes are of course emblematic of another typical Apple phenomenon: scarcity of appropriately priced components, cutting-edge and common, as it scales production of new devices. Inventory delays are now so frequent they appear to be built into many forecasts.
All told, Apple played a touch-and-go quarter well, though with one of its most overhyped product launches just weeks away, the risk of a misstep that disappoints both buyers and markets, remains just as high. The stock’s well-established history of deep corrections will remain in the spotlight, particularly if it racks up another record peak on Wednesday.
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