Tariff Pressures vs. AI-Driven Replacement Surge: What Will Apple's Earnings Show?
After the market closes on May 1st, Eastern Time, $Apple(AAPL)$
Year-to-date, Apple's stock price has declined by approximately 16%, underperforming the S&P 500 Index (which fell by 10% during the same period), primarily due to concerns over gross margins and revenue caused by tariff uncertainties. However, Apple's stock price has rebounded somewhat following the U.S. announcement on April 11 that smartphones and PCs would be exempt from reciprocal tariffs.
Looking ahead to this earnings release, investors will still focus on the growth of Apple's revenue, iPhone revenue, and service revenue. Unlike in the past when the focus was solely on performance data, the market this time may be more concerned with the company's profit forecasts for the next few months.
For investors, two factors need to be weighed before the earnings report is released: the possibility of Apple continuing to outperform expectations and the potential impact of risk events on valuation. Although current data suggests a relatively high probability of exceeding profit expectations, external variables such as the Trump administration's tariff policies and fluctuations in global consumer electronics demand could still emerge as "black swans."
Mobile Business
In terms of iPhone revenue, which contributes the most to Apple's performance, Goldman Sachs estimates that the iPhone business line will generate approximately $47.8 billion in revenue in Q2, a year-over-year increase of 4%, which is higher than the Wall Street average estimate of $45.6 billion.
Goldman Sachs noted that the growth in iPhone revenue should be driven by a 10% year-over-year increase in sales volume. This is attributed to the launch of the iPhone 16e, which offers a more affordable price point while providing an experience comparable to flagship models; the concentration of demand in advance due to significant uncertainties surrounding U.S. tariff policies; and the AI-driven replacement cycle.
On April 15, IDC reported that Apple's iPhone shipments reached 57.9 million units in Q1 2025, up 10% from 52.6 million units a year earlier. The surge was partly due to advance stocking in the U.S. market amid tariff concerns and large shipments to other regions to avoid supply chain disruptions.
On the same day, Canalys data showed that Samsung reclaimed the global smartphone market lead with a 20% share in Q1 2025, while Apple's share rose to 18% from 16% in Q1 2024. However, Apple's performance in China continues to decline.
Apple's smartphone shipments in China fell 9% year-over-year in Q1 2025, with its market share dropping to 13.7%, marking the seventh consecutive quarterly decline. Analysts cited insufficient product innovation and limited AI functionality as key challenges.
In February, Apple launched the iPhone 16e, priced at $599, to boost sales. IDC reported that its sales volume in China in the first three days was 60% higher than the iPhone SE in 2022.
A new iPhone replacement cycle driven by Apple's AI functionality has begun. Goldman Sachs expects this cycle to drive significant growth from the second half of the year. However, recession risks (with a 45% probability of a U.S. recession within 12 months) may limit demand growth.
Services Business
Apple's services revenue share and gross margin are set to rise. Services include Apple Care, Apple Card, Apple Pay, and Apple Store offerings. With AI advancements, some AI agent projects may start charging fees. Analysts say Apple's expanding ecosystem and AI services are boosting revenue and profit margins. This business is likely to remain a key growth driver.
Goldman Sachs expects Q2 services revenue to grow 11% YoY to $26.5 billion, driven by a 13% increase in App Store billing and a 44% rise in iCloud+, AppleCare+, Apple One, and Apple Pay. Apple TV+ revenue could hit $1.5 billion, with over 60 million subscribers.
Other Businesses
In the Mac business line, Goldman Sachs estimates that F2Q25 revenue will be approximately $7.7 billion (indicating a 3% year-over-year growth). The launch of the new M4 products is expected to drive a significant 15% increase in overall Mac shipments.
For the iPad business line, Goldman Sachs estimates that F2Q25 revenue will be around $6.1 billion (indicating a 9% year-over-year growth). The average selling price (ASP) is expected to exceed expectations with a 5% year-over-year increase, driven by the premium pricing strategy of the 13-inch iPad Air.
Tariff Impact
On April 2, Trump signed two executive orders on "reciprocal tariffs" at the White House, announcing that the U.S. would impose a "minimum benchmark tariff" of 10% on trade partners and higher tariffs on certain trade partners, including China, India, and other major production bases for Apple.
Against this backdrop, the market will closely monitor the potential tariff impacts on the supply chains and imports of U.S. tech giants. Analysts believe that $Amazon (AMZN.US)$ and $Apple (AAPL.US)$ may be the two tech giants most severely affected by the tariff storm. For Apple, although it may benefit in the short term from consumers' advance purchases due to fears of price increases, the full implementation of tariffs will subject Apple to dual pressures of rising supply chain costs and declining consumer purchasing power.
Tariffs have significantly increased the production costs of Apple's iPhones, forcing Apple to consider price hikes and accelerate adjustments to its global supply chain. TechInsights, a research firm, has indicated that the exponential growth of tariffs is having a significant impact on the smartphone industry's supply chain.
On April 11, the U.S. Customs and Border Protection exempted some electronics, including smartphones, from the "reciprocal tariffs." The reciprocal tariff exemption for smartphones and PCs is beneficial for Apple in the short term, but uncertainties in trade policy and growth remain. Apple is addressing potential tariff risks through strategies such as diversifying production locations.
Goldman Sachs noted that the tariff exemption for electronics, including smartphones and PCs, on April 11 will provide short-term relief from tariff impacts. However, the U.S. Department of Commerce's Section 232 investigation into semiconductors could lead to new tariff policies targeting the semiconductor and other tech sectors (if semiconductor tariffs are imposed, smartphones and PCs will inevitably be affected as well).
What Do the Big Banks Think?
Goldman Sachs' analysis team projects that Apple's F2Q25 earnings per share (EPS) will reach $1.64 (exceeding the Wall Street average estimate of $1.61), with revenue expected to hit $95.4 billion (surpassing the average expectation of $94 billion). Goldman Sachs attributes its strong growth forecast for Apple to the following factors:
– The new replacement cycle driven by Apple Intelligence, as well as restocking of new products like the iPhone 16e and M4-based MacBook Air, Mac Studio, and iPad to meet consistently strong demand;
– A significant frontloading of iPhone demand due to tariff concerns, which reinforces the replacement logic;
– Intensified competition among U.S. carriers, leading to increased promotions for iPhone bundling;
– The continued robust performance of Apple's services business, supported by Apple's strong ecosystem moat.
Goldman Sachs expects Apple's overall gross margin for fiscal 2025 to be 47.1% (in line with the consensus estimate), which falls at the midpoint of the guidance range (46.5%-47.5%). Additionally, Apple's management may announce a new share repurchase authorization, which could significantly boost bullish sentiment toward Apple's stock price. Apple typically announces new repurchase plans in the second fiscal quarter (for example, it announced an $110 billion share repurchase authorization in the second quarter of fiscal 2024).
Bank of America stated in its research report that due to tariff concerns prompting an early release of some iPhone replacement demand this year, it has slightly raised its revenue forecasts for Apple's first calendar quarter (ending in March) and second quarter (ending in June). Bank of America's latest expected price-to-earnings (P/E) ratio for Apple is at a higher level compared to Apple's historical valuation range of 16-34x forward P/E over the past decade (with a median of 27x).
The analysis team noted that given Apple is in the midst of a multi-year iPhone upgrade cycle, coupled with its substantial cash reserves for share repurchases and opportunities to expand into new terminal markets (including a foldable iPhone), as well as the increasing diversity of its consumer electronics portfolio and services business, it is reasonable to assign Apple a valuation multiple close to the high end of its historical range.
However, Bank of America has lowered its revenue and EPS forecasts for Apple's third and fourth calendar quarters, as well as for the next two years, to reflect higher long-term operating costs due to more complex supply chains and the delay in launching a Siri digital assistant with more advanced AI capabilities.
Evercore ISI believes that Apple's first-quarter 2025 results are likely to exceed market expectations, but the focus will be on the second-quarter guidance and how tariffs are factored in. The firm noted that in the short term, Apple's stock price will be driven by geopolitical factors, but it expects Apple to mitigate tariff impacts through various strategies.
Evercore ISI projects that Apple's revenue in the Chinese market will be flat or slightly down (with a pessimistic expectation of a mid-to-high single-digit decline), iPhone revenue may be flat or slightly lower, and the services business will maintain low double-digit growth. Notably, favorable exchange rates will provide a significant offset for Apple.
How Has Apple's Stock Performed on Past Earnings Days?
Currently, Apple's implied move stands at ±4.65%, indicating that options markets are betting on a single-day price swing of 4.65% following its earnings release. In comparison, Apple's average post-earnings stock movement over the past four quarters was ±2.2%, suggesting that the current option value is overpriced.
Over the past 12 earnings days, Apple's stock has had an equal probability of rising or falling (50% each), with an average earnings-day stock movement of ±3.0%. Regarding the direction of this earnings' post-release movement, options volatility skew data indicates that the market is slightly leaning towards a bearish outlook.
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