Five Things Wall Street Wants to See in Apple's Results

(Bloomberg) -- Apple Inc. shares have soared 44 percent this year, in part due to anticipation for the most important new product from the company in years, the iPhone X. Whether that rally can continue will hinge on what Apple forecasts for sales of the device this holiday.

That’s one of the questions analysts and investors will be asking when Apple reports fiscal fourth-quarter results after the close of trading on Thursday.

1. The impact of the iPhone X

The iPhone X has several new features, including a 3-D facial recognition system called Face ID. Apple has suffered production delays with some Face ID parts, which may limit supplies of the device in the crucial holiday quarter. If there aren’t many iPhone X models to sell, will people buy an Android phone instead, or pick up a less-advanced, cheaper iPhone 8? 

On Thursday, the company will shed light on this when it forecasts revenue and gross profit margins for the three months through December. Analysts predict revenue of $85 billion and a gross margin of 38.5 percent, according to data compiled by Bloomberg. If Apple forecasts higher revenue and fatter margins, that would suggest it has a lot of iPhone X devices to sell in the period. The opposite may show production issues really will make people wait.

Either way, some analysts are optimistic consumers will tolerate any holdup. “Rumored delays in the iPhone X do not appear likely to depress sales materially, since consumers appear to be relatively patient with Apple,” Toni Sacconaghi, an analyst at Bernstein, wrote in a recent note. “Though poor functionality with Face ID seems to be a bigger risk.”

Morgan Stanley analyst Katy Huberty recently forecast 30 million iPhone X unit shipments in the fourth quarter (Apple’s fiscal first quarter). That’s 40 percent of projected total iPhone shipments in that period. For Apple’s 2018 fiscal year as a whole, she expects just over 124 million iPhone X models to be shipped, or 47 percent of the forecast total.

2. The meaning of a more expensive phone 

Another big change with the iPhone X is the price. For years, new iPhones have cost about $650, while this model starts at $999. "The ‘x factor’ with the Apple story is whether consumers will spend $1,000-plus, and here, we remain cautious,” Mark Moskowitz, an analyst at Barclays, said. 

Still, demand already appears to be high following pre-orders that started Oct. 27. If the iPhone X accounts for a greater portion of total iPhone sales than expected, that will drive up average selling prices as well as the firm’s revenue growth, according to Gene Munster of Loup Ventures. For Apple’s fiscal fourth quarter, which ended in late September, analysts expect an average iPhone selling price of $633. Apple likely won’t forecast ASPs for the holiday quarter, however, analysts estimate just over 80 million total iPhones will be sold in that period, with an ASP of $729, according to estimates compiled by Bloomberg.

3. The China question

In the third quarter, Greater China was Apple’s only major region to see a revenue decline. Analysts, however, are optimistic that the iPhone X will be a hit with Chinese consumers, boosting revenue from the region in coming quarters. 

“During our recent China Tech Tour, we uncovered positive vibes around the iPhone X,” Brian White at Drexel Hamilton wrote in a recent note. “With this iPhone cycle ramping, we believe Apple’s sales cycle in Greater China could turn positive on a quarterly basis in the first half of fiscal year 2018."

4. The iPhone 8

Wall Street research notes are fixated on the iPhone X, while the iPhone 8 is mostly an afterthought. Analysts mostly expect demand for the 8 to be soft. Some are even hoping sales will be weak because that would mean more buyers for the pricier iPhone X.

“Our bet is that Apple will address the critical iPhone X demand question and direct investors to think about iPhone X demand as similar to iPhone 8,” Munster wrote in his recent note. “These comments should be a positive for the Apple story given most investors believe iPhone X will account for 15 percent to 20 percent of fiscal year 2018 iPhone units, when in fact iPhone X may account for closer to 25 percent of units.”

5. Apple’s other products

IPhones account for about two-thirds of Apple revenue. However, that other third still matters, and analysts will be listening for the company’s guidance on sales of the Watch, TV video streaming boxes, Macs and iPads. “Apple Watch purchase intent is high, nearly as high as iPad’s, despite it representing less than one-third of iPad unit volumes today, pointing to the potential for upside surprise in fiscal year 2018,” Bernstein’s Sacconaghi said.

The HomePod is Apple’s next major accessory. It will be a hub for the home, pushing customers to buy connected devices that integrate with Apple’s HomeKit platform. People will be less interested in swapping their iPhone for Android devices if their home is run with iPhone-compatible appliances. The HomePod is also a new distribution tool for Apple Music, which could spur additional subscriptions for that service.

Drexel’s White is bullish on what Apple has to offer beyond iPhones. “Apple’s stock will not only benefit from this iPhone cycle but also the company’s capital distribution initiative, attractive valuation and potential new innovations,” he concluded.

©2017 Bloomberg L.P.