Apple earnings: Don’t focus on iPhone sales. Instead watch this metric.

For all the attention on Apple Inc.’s iPhone sales, a less glamorous item could be the big driver of the stock after earnings.

JPMorgan’s Samik Chatterjee wrote that Apple’s
margins could be the big swing factor for Apple’s stock in the wake of its Thursday afternoon report.

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“Premiumization of the iPhone with price-mix tailwinds along with tight cost management are helping hardware margins, and the mix change to services will contribute further to the margin improvement, which could drive upside to the gross margin guidance of 45%-46%” that the company outlined for its recently completed fiscal first quarter, he said.

That’s especially the case as Apple likely saw some “volume leverage” in that December quarter. Third-party data indicated Apple benefitted from “robust sell-in volumes” for the iPhone during the period.

As such, “the range of outcomes on revenue” looks somewhat narrow, he noted, which is why so much focus could be on margins.

Margins are key to investors because they may signal earnings revisions, which in turn could determine whether Apple’s stock keeps its “premium” multiple, according to Chatterjee.

Here’s what to expect in Apple’s December-quarter report, due out after Thursday’s closing bell.

What to expect

Earnings: Analysts tracked by FactSet expect Apple to report $2.10 in earnings per share, up from the $1.88 it posted a year before.

Revenue: The FactSet consensus calls for $118.0 billion in revenue, up from $117.2 billion a year earlier.

On a segment basis, analysts are modeling:

  • iPhone revenue of $67.6 billion, up from $65.8 billion a year before

  • iPad revenue of $7.4 billion, down from $9.4 billion a year before

  • Mac revenue of $7.9 billion, up from $7.7 billion a year before

  • Wearables, home and accessories revenue of $11.3 billion, down from $13.5 billion a year before

  • Services revenue of $23.3 billion, up from $20.8 billion a year before

Stock movement: Apple shares have dropped following each of the company’s last two earnings reports, though they gained following each of the four prior ones. The stock is up 28% over 12-month span, as the S&P 500 has increased 18%.

What analysts are saying

Analysts will be watching for any commentary on the Vision Pro headset, which officially becomes available Friday and thus didn’t impact the most recent quarter.

“[W]e expect management to make constructive comments regarding initial sales, customer response, and developer feedback on the call,” Oppenheimer’s Martin Yang wrote, though he expects the device will contribute less than 1% to the company’s March-quarter revenue total.

See also: Apple Vision Pro may have sold out, but one analyst has a ‘major concern’

Overall, he sees “cautious” buy-side sentiment going into the report, “with concern of Apple reversing to [year-over-year] revenue decline again in [the March quarter] given the weakness in Mac and negative data points for iPhone’s market share.”

Apple is expected to snap a four-quarter streak of year-over-year revenue drops with its December-quarter results.

See more: Apple earnings are on tap. Can the iPhone maker snap an ugly streak?

Another focal point will be general trends in China, with CFRA analyst Angelo Zino calling the region “an unknown.”

“Greater competitive pressures (potential revitalization of Huawei), as well as implications from greater geopolitical uncertainties (e.g., potential ban of usage in certain work environments or ban of certain products/services over time), present a risk,” he wrote recently.

He expects a mid-single-digit drop in revenue for the December quarter, “hurt by competitive pressures/promotions.”

While he expects the company will beat the consensus view with its overall results and guidance, he also sees the potential for management to be “conservative” with its guidance.

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