Apple Earnings: Analyst Expects Overall 'Solid' Quarter, But Longer-Term Concerns Remain

Shares of Apple Inc. (NASDAQ: AAPL) were trading higher by nearly 0.50 percent on Tuesday morning — mere hours before the company's second-quarter earnings report would be released after the trading session.

Wells Fargo's Maynard Um maintains a Market-Perform rating on Apple's stock with a valuation range of $135 to $145. Um offered some thoughts on what to expect in the earnings report ahead of the release.

Solid Quarter

Based on the math behind an ongoing dispute with QUALCOMM, Inc. (NASDAQ: QCOM), the analyst is estimating Apple will report it has shipped roughly 51 million iPhone units in the quarter ($35.2 billion in sales at an average selling price of $665). Meanwhile, the Street is looking for Apple to report it shipped 52.2 million iPhone units, which implies some risk to the analyst's total $53.4 billion revenue estimate for the quarter.

Um is, however, expecting a "solid" gross margin rate of 39.1 percent versus the Street's 38.7 percent estimate.

High Expectations For Capital Allocation

Um noted that Apple has already boosted its share repurchase authorization program by $50 billion, $30 billion, $50 billion and $35 billion in each of the past four years. The company also hiked its dividend by $0.06, $0.03, $0.05 and $0.05 per share over the same period.

However, an increase to both allocation programs merely in-line with the past four years will be considered "disappointing" amid heightened expectations. The analyst suggested Apple could tap the debt market to finance further authorizations, although a "materially larger" return could be limited.

Bottom Line

Um also commented on the latest rounds of iPhone 8 rumors, which suggest the phone won't be released until next year. The analyst continues to "expect an on time launch."

Bottom line, the analyst's concerns surrounding off-cycle demand, the June quarter, the potential for a delay in the iPhone 8 and ongoing litigation woes all offset positive factors including tax reform and the eventual iPhone 8 supercycle.

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