Apple Stock Is Under Pressure. Why Its Earnings Could Trigger a Rebound.

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Investors are feeling a little jittery about

Apple

stock, and for logical reasons. The company’s June quarter earnings report is less than four weeks away, and there are reasons to worry. 

In particular, there are signs of slowing demand for both smartphones and personal computers, especially—but not exclusively—in China. After the close of trading Thursday, the memory chip company Micron Technology(ticker: MU) posted May quarter results that were about in line with estimates, but projected August quarter revenue sharply below the Street’s consensus forecasts. The new forecast largely reflects a sharp falloff in demand for PCs and smartphones in China: Micron said weakness in China consumer tech end-markets trimmed its sales guidance by about 10%.

Street consensus estimates call for Apple to post June quarter revenue of $82.4 billion, with profits of $1.16 a share. When the company reported March quarter results, Chief Financial Officer Luca Maestri had cautioned that Apple expects a $4 billion to $8 billion hit to top-line growth in the June quarter from supply constraints, along with nearly 3 percentage points of drag from unfavorable foreign exchange rates, with a 1.5 percentage point hit from the suspension of sales in Russia.

In a research note on Friday, J.P. Morgan analyst Samik Chatterjee makes the case that Apple can hit the current Street consensus for the quarter. Normally, that wouldn’t be saying much, but he contends that the buy side expects an earnings miss due to slowing consumer spending and wider-than-projected foreign-exchange headwinds.

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Chatterjee says better supply dynamics in the quarter will overwhelm modest demand weakness and the wider-than-forecast drag from currency, which he estimates will be 4.5 percentage points.

The analyst is a little more concerned about the medium-term, though. Chatterjee sees iPhone and iPad sales as vulnerable to softening consumer sentiment; he projects iPhone sales in the second half of calendar 2022 will be down about 4% from a year earlier. But he’s still bullish on the company’s long-term outlook, and keep his Overweight rating and $200 price target.

In particular, he says Apple is well-positioned to outperform the market in almost any macroeconomic environment. A recession, he writes, would “showcase resilient iPhone demand driven by replacement cycles,” and would be buoyed by a substantial earnings contribution from services. And if the economy stabilizes, he adds, Apple could see upside from a rapid consumer rebound.

Apple shares are little changed on Friday. The stock is off 16% since the company’s last earnings report and down 23% for the year to date. The company remains the single largest U.S. company by market cap, with a valuation of $2.2 trillion.

Write to Eric J. Savitz at [email protected]