Apple earnings could be the lone bright spot after a punishing month for tech

Key Points
  • Apple reports fourth-quarter earnings after the closing bell.
  • Most big tech companies saw their stocks drop in October, but Apple held up better than the rest.
  • The company's new, more expensive iPhones are expected to boost profits dramatically over the year-ago quarter.
Expect to see positive Apple reaction for the next month or so, says pro

October was a punishing month for technology stocks, but as Apple prepares to report fiscal fourth-quarter results Thursday afternoon, it's managed the downturn better than any of its peers.

Facebook closed down 7.7 percent for the month. Amazon was down 20 percent, its worst month since November 2008. Netflix slid 19.3 percent. Alphabet ended the month down 9.7 percent. And the tech-heavy Nasdaq composite index was down 9.2 percent, its steepest drop since November 2008.

Apple largely bucked the trend, finishing October down just 3.1 percent.

If Apple can deliver a strong earnings report, investors will be justified in viewing it as one of the most reliable big tech stocks to own. Netflix may dominate the world of digital entertainment and Amazon is positioned to own cloud computing and retail, but Apple has the most consistent profit engine, thanks to the millions of devices it sells every quarter.

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Wall Street analysts are expecting Apple to report revenue of $61.57 billion and earnings per share of $2.78, according to a Refinitiv survey. Analysts are predicting sales of 47.5 million iPhones, 10.53 million iPads and 4.87 million Macs, according to StreetAccount and FactSet.

A big theme will be the rising average selling price (ASP) of the iPhone. If Apple can hit the Street's estimate for earnings per share, that would mark a 34 percent increase from a year earlier. The days of massive iPhone unit sales growth appear to be over, but Apple has figured out a new formula to squeeze even more profit out of its most important product.

Last year, the company started selling the iPhone X at $999. It was Apple's most expensive iPhone ever. It also sold the iPhone 8 for $699, or $50 more than its predecessor, the iPhone 7. That helped boost the iPhone's ASP throughout 2018.

This year, the iPhone lineup got even more expensive. The iPhone XR starts at $749, or $100 more than the iPhone started at just two years ago. And the iPhone XS and XS Max start at $999 and $1,099, respectively.

Bernstein analyst Toni Sacconaghi wrote last week that Apple's bet to charge more for the iPhone will pay off in a big way. He predicted an $800 ASP for iPhones in the fourth quarter, up 29 percent from the year-ago quarter. That figure doesn't even account for the iPhone XR, which went on sale at the beginning of the current period. Many predict the XR will be the most appealing model and could increase ASP quite a bit more during the holiday quarter. Apple's guidance on Thursday should provide even more clues as to how well the more expensive iPhones will sell.

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Software and services

Beyond the iPhone, Apple has the same growth story it's been telling for the last few years. The company is still exploring new ways to grow its services revenue, which includes things like App Store sales, Apple Music subscriptions and iCloud storage.

There could also be a bump in Apple's "other products" category, which includes hardware like AirPods and the Apple Watch. Apple launched its newest Apple Watch, the Series 4, at the end of last quarter. Like the new iPhones, the $399 Series 4 is also more expensive than the last model, which started at $329.

Expect that to be the story throughout 2019 as well. Apple has learned that it doesn't need to sell more iPhones and Apple Watches to keep growing profits. It just needs to find new reasons to charge you more.

Apple is expected to announce its fourth-quarter results around 4:30 p.m. ET Thursday.

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