Apple shares have got their mojo back ahead of Q4 earnings report

Having seen the tech giant’s shares price suffer its worst correction in five years, when prices fell a whopping 45% in the space of six months, investors have had much more to cheer about lately.

Reasons to be cheerful

1. Share price recovery: Prices have recovered to the tune of 34% in the last four months alone to trade back above the $500 level (note: shares topped out at $705 in the summer of 2012).

2. New product development: Much of the negative sentiment surrounding the firm was due to fears over its ability to continue to innovate. In recent months, Apple have launched two new mobile devices (the 5C and 5S), an updated operating system (iOS7) and, just this week, it launched a new iPad air tablet device.

3. Inroads in China? Speculation is rife that Apple may be close to securing a deal with China Mobile to market its iPhones, enabling it to access over 700mn mobile subscribers. Add to this the recent hire of Burberry CEO, Angela Ahrendts, as well as the aforementioned launch of the cheaper iPhone 5C, and the barriers to successful growth in China appear to be waning.

Q4 earnings forecast

The current market consensus is for Apple to report a 9% drop in earnings per share for the final quarter of this year, compared to the same period a year ago. EPS is expected to come in at $7.89. Apple itself raised forecasts for the quarter after seeing the popularity of its new iPhone devices. The tech bellwether now expects fourth quarter revenues to come in towards the top end of expectations: meaning a figure close to $37bn.

However, there‘s growing optimism that we could see Apple beat these forecasts.

The timing of the release of the iPhone 5C and 5S devices is expected to give the firm a much needed sales boost. They confirmed to the market last month that sales of both devices topped 9mn the first three days of sales – a new record. Compare that to the 26.9mn iPhones sold in the same reporting period a year ago (and 14mn iPads), and we should see a healthy bounce in iPhone sales. The market is edging towards a 34mn sales number for iPhone devices in the quarter, which would point to a 26% uplift year-on-year.

The bar has been raised and so Apple must now meet it. Last time around they tried to cushion a poor quarter’s performance by declaring a cash dividend of $2.65 a share. This is unlikely this time around. So they have to meet market expectations, at the very least.

Deal with China Mobile?

The only way they can calm sentiment if numbers miss forecasts is by reaching a deal with China Mobile. China Mobile remains the brightest prospective star in the next phase of Apple’s market domination strategy. Without China Mobile, it will be very hard for Apple to break through Samsung’s dominance in the Chinese market. China Mobile itself brings at least 700m prospective new customers to Apple. That’s huge, bearing in mind we’re expecting Apple to sell around 34m iPhones this quarter, globally.

According to IDC, Apple has a 5% share of the smartphone market, far behind Samsung’s 18.3%, leaving the firm in seventh place. Apple is expected to double its market share in China by the end of 2014, with shipments increasing by 25% to 450mn and it needs a deal with major mobile providers to do that. Step in, China Mobile?

China Mobile itself has struggled lately. The world’s largest phone company reported that its net income for the last quarter fell 8.8% to 28.4bn yuan – missing consensus expectations by a third. CEO Li Yue is fighting against a decline in market share and rising network costs. Step in Apple Inc?

You can see more about Apple vs Samsung: the battle for China in our infographic.

Speculation that a deal with China Mobile could come to fruition this year has now been watered down and it is becoming more and more likely to happen next year. China Mobile itself announced they had no deal with Apple to sell iPhones earlier this week. That puts to bed the idea that Apple may report a development on this front next Monday.

Chart analysis

Despite the recent 45% fall in Apple’s shares price, recent moves have been much more positive, raising optimism that buyers have started to come back in swarms. The fact remains that Apple’s shares price rose far too high too quickly and was due a significant correction. As you can see from the chart below, the euphoria surrounding Apple’s dominance and race to become the first trillion dollar company altered the steepness of its price trajectory. This trajectory was always unsustainable. A price correction was due.

The 45% fall was perhaps more than many had predicted but prices have started to recommence into a second upward trend channel, allowing for a more conservative pace of gains than at the start of 2012. This helps to make gains more sustainable.

A solid set of earnings to finish the year followed by an announcement next year of an agreement with China Mobile will play strongly in keeping buyers dedicated.

If near term momentum continues then Apple shares have every chance of reaching $600 by the end of Q1 2014. I would be concerned if we start to see second corrections, with prices falling back below the $460 and $395 levels. For now, buyers are starting to regain control.