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Key takeaways
- Analysts estimate EPS of $ 0.69 versus $ 0.76 in the fourth quarter of fiscal 2019.
- Service revenue is expected to increase, but at a slower pace compared to previous quarters.
- COVID-19 may cause a decline in revenue after strong growth in the third quarter of fiscal 2020.
Apple Inc. (AAPL) posted record financial results in its most recent quarter, the third quarter of fiscal 2020, as the company benefited from the global COVID-19 pandemic. Demand for many of its products soared amid the growth of the work-from-home economy.
Investors will be watching to see if Apple can sustain that growth when it reports earnings on October 29, 2020 for the fourth quarter of fiscal 2020.The company’s fiscal year ended in September. Analysts are expecting year-over-year (YOY) declines in both earnings per share (EPS) and revenue, marking the first drops since fiscal 2019.
Investors will also focus on a key metric in fourth quarter results: the iPhone maker’s service revenue. Apple has long been known for its hardware products, such as smartphones and computers. But it is diversifying aggressively by expanding service revenue, thereby reducing its dependence on hardware sales.Analysts expect Apple to report healthy growth in service revenue year-on-year.
Apple’s success this year has been reflected in its actions, which have outperformed the overall market. Apple shares have provided a 91.1% total return over the past 12 months, well above the 15.3% total return of the S&P 500, as of October 23, 2020.
The stock jumped after the company released record quarterly results that beat analyst expectations in the third quarter of fiscal 2020.EPS rose a solid 18.4% year-on-year, the second-fastest growth rate in the past seven quarters. Revenues grew 10.9%, marking the fastest pace since the fourth quarter of fiscal 2018.
The growth was generalized in all geographic segments of the company and in products and services.It was also a definite improvement from the more modest EPS growth of 3.8% and the anemic revenue growth of 0.5% recorded in the second quarter of fiscal 2020.After Apple’s earnings report on July 30, the stock advanced to early September. Since then, the stock has shifted down and sideways.
Analysts are currently forecasting a drop in revenue and earnings in the fourth quarter of fiscal 2020. Earnings per share are expected to decline 9.3% year-over-year, the biggest drop since the second quarter of fiscal 2019. It is expected that Revenues to fall 1.1%, the first decrease since the second quarter of fiscal 2019. -Year 2020, analysts expect earnings per share and revenue to increase 8.5% and 4.9%, respectively , an improvement over the annual drops recorded for both numbers in fiscal 2019.
| Apple key metrics | |||
|---|---|---|---|
| Estimate for the fourth quarter of 2020 (fiscal year) | Fourth quarter of 2019 (fiscal year) | Fourth quarter of 2018 (fiscal year) | |
| Earnings per share ($) | 0.69 | 0.76 | 0.73 |
| Income ($ B) | 63.3 | 64.0 | 62.9 |
| Income from services ($ B) | 14.0 | 12.5 | 10.6 |
Source: Visible Alpha
As mentioned, a key metric that investors will focus on is Apple’s service revenue. Its services include the company’s digital content stores and streaming services, such as its various App Store, Apple Music, and Apple TV + platforms. Apple also generates revenue from Apple Care services, licenses, and other services, including Apple Arcade, Apple Card, and Apple News.The company began focusing on its service business in 2015, when iPhone sales growth began to slow. Profit margins on service sales are dramatically higher than Apple’s hardware profits. That means every dollar of additional service sales disproportionately increases Apple’s earnings compared to hardware sales. To drive service sales, the company has introduced a host of new subscription services and is increasingly seen not only as a hardware company, but as a major player in the software business.
Apple’s service revenue has grown rapidly in recent years, with growth ranging from 25% to 40% in 2018. Although growth slowed the following year, service revenue generated about 18% of the total company revenue at the end of fiscal 2019. The slowdown trend has continued in 2020, but service revenue continues to grow at a solid pace. It grew 16.6% year-on-year in the second quarter of fiscal 2020 and 14.9% in the third quarter of fiscal 2020. Analysts forecast that service revenues will increase 11.5% in the fourth quarter of the year fiscal 2020, the slowest pace in at least the last four years. For the full year 2020, analysts expect service revenue to rise 14.9%, the slowest pace in the past five years.
