Apple sees fastest slow quarter for years

Apple juiced iPhone sales above forecast in its typically modest third quarter, despite shoppers widely assumed to be holding off.

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 ‘mother 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 mother 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 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.

DAILY CHART: APPLE INC.

Cash-equity charts that don’t show price action after the prior official close—like the one for Apple below—offer a unique insight into the next trading session. 

• Since we know Apple traded as high as $159 in Tuesday’s after-hours market, and with pre-market prices at around $158.60 at the time of writing, it is highly likely that the shares will mark a new all-time high, above the previous $156.65 peak (15th May) on Wednesday
• To do this, the stock will thereby have to breach a visible line of presumably short-term resistance above Tuesday’s high of $150 which is cogent with a set of lows and tops over the last seven sessions
• Resistance breaks tend to go hand in hand with enhanced momentum, so it’s even possible the stock could surpass pre-market indications at some point 
• More broadly, AAPL’s chart has generally been constructive since wrapping up a prolonged and profound spell of consolidation between August 2015 and August 2016
• The phase notably marked an unusual sojourn by the stock beneath its 200-day moving average. Any trading that manages to remain above the threshold is therefore instantly recognisable as range-expansive to the upside
• Since February, the stock has also regained prices above the topside of a rising trend line that commenced in June 2016. It is additional backing for the view that price action will largely be constructive for the foreseeable future, particularly after the underside of the line was tested and bested as recently as last month
• The implied break of directly overhead resistance may come with the violation of a relatively recently formed declining line off highs seen earlier in the summer. That would, if seen, essentially be a triangle breakout continuation pattern that could seal further upside regardless of natural misgivings that occur at new tops
• Only divergent momentum currently argues against an outright bullish tone over the near term: Apple’s slow stochastic sub chart has been clearly declining even as the stock set July highs at the end of that month. Even so, the gauge appeared to invert on Tuesday, possibly signalling a change in direction
• Either way, the least probable outcomes at this point would be a sustained break of the rising trend, a loss of natural support at 50% or 61.8% of Apple’s 27th March-15th May up leg, let alone the complete loss of clear support around $142.35.

Source: Thomson Reuters and City Index