BAR SET HIGH FOR APPLE AND MICROSOFT AS THEY TRADE NEAR MULTI YEAR HIGHS

Extended commentary by Michael Hewson, Chief Market Analyst, CMC Markets UK

Ahead of Apple’s Q3 results and Microsoft’s Q4 earnings announcement,Michael Hewson analyses the tech market and what to expect from the tech rivals.

Within the report Michael discusses:

  • What investors will be looking for in Apple’s Q3 results after a successful Q2
  • How cheaper devices in the Chinese markets could cast a spell for tech giants
  • What we could see from Apple in the future, including an iPhone 6 made of sapphire glass, an update on iWatch or a revamp to AppleTV
  • The expectations of Microsoft since their newly appointed Satya Nadella took over as CEO
  • How Microsoft’s latest Q4 earnings announcement should give an update to Nadella’s new vision of a “one Windows” model for the company.

The last time Apple shares were trading at these sorts of levels (below $100) was all the way back in 2009. So last month’s stock consolidation was certainly welcome news for those investors who found themselves priced out from buying the stock in the rally that we saw from 2009, to when we peaked in 2012 at $705.

Michael Hewson
Michael Hewson

Since those peaks, we have seen a sharp decline in its share price, after the botched Apple Maps launch, which saw the shares find a base in 2013. When the recent stock consolidation was announced in April this year, the shares enjoyed a sharp rise after earnings beat expectations as the sales of the new iPhone 5 started to gain traction.

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The highlights in Q2 were 43.7m iPhones sold, 16.3m iPads and 4.1m Macs, with quarterly revenue at $45.6bn and quarterly net profit of $10.2bn. With Q3 earnings due on the 22nd July, attention will inevitably be focussed on the these headline numbers once again, particularly given the very disappointing update earlier this month from its big rival Samsung.

Samsung announced earlier this month that it expected to see its third consecutive decline in quarterly profit, as it struggles to compete with cheaper devices in the Chinese market, losing market share in the process. The company did cite the strength of the Korean won as a contributory factor, but there does appear to be a significant impact to its market share, given that it appears to have a large amount of unsold inventory in Europe and China.

Samsung’s problems could also spell bad news for Apple in the wake of its recent tie up with China Mobile to sell iPhones, which did raise expectations of a significant increase in revenue growth in the rest of 2014, due to the sheer size of China Mobile’s user base. These concerns help explain the guidance for Q3, which estimates a fall in revenues to between $36bn and $38bn, and a fall in net profits to $7.4bn.

In terms of share price performance, the most recent quarter has been much better than the previous one, but be under no illusions that the forthcoming quarter will be just as much about what has happened in the last three months, but also about what the company has in its pipeline, after the announcement in May of the “best product pipeline in 25 years” by senior Apple VP Eddy Cue.

 Talk about ramping up expectations, particularly with the share price closing in on its adjusted all-time highs of $100.72. A failure to deliver on these expectations could well see the share price drop sharply, particularly if details of the pipeline fail to emerge or excite.

Rumours have abounded since then of an iPhone 6, made of sapphire glass with a bigger screen to compete with the latest Samsung Galaxy phone. Any redesign of the iPad is likely to be minimal given recent upgrades; however there may also be some tweaks with iOS8. We could get some news about progress on wearable technology, like an iWatch, while AppleTV is also well overdue some form of revamp.

Recent high profile acquisitions have also seen Apple in the spotlight, particularly the purchase of Beats for $3bn, which still needs to be given the green light by the European Commission, as it looks to improve its streaming services.

Microsoft.

It’s been nearly six months since new CEO Satya Nadella got his feet under the desk at Microsoft and this week’s latest trading update will be akin to the new boy’s first school report at the end of the first term.

Nadella’s elevation to CEO has been part of a long term strategy to reposition the software giant away from its old legacy markets and into cloud computing.

In the second quarter just after Christmas, the company beat expectations through increased Xbox One and Office sales, but its Surface tablet device has struggled to gain traction, as users struggle to get to grips with the new look of Windows 8.

As we come to the end of Microsoft’s fiscal year, the latest Q4 earnings announcement should give us some early indications of how far along we are with Nadella’s new vision of a “one Windows” model for the company.

Nadella’s determination to implement a new cloud based computing model has seen Microsoft really push its new one drive cloud storage service , with a free 15GB for everyone with a One Account, while at the same giving 1TB for Microsoft Office 365 users.

With the launch of the new iPad apps for Word, Excel and Powerpoint in the iTunes store there appears to be have been a realisation that a lot of Microsoft customers also use an Apple device and being precious about supporting Apple devices could cost Microsoft additional revenue, particularly in a world where Microsoft is no longer the only game in town.

Office 365 accounts for over 60% of Microsoft operating profit and anything that can make this much more sticky as well as potentially increase it needs to be done.

While the new apps are free to download you need an Office 365 subscription to get the most out of them and this latest update should give us some initial indications as to how successful the initial roll-out of these new apps have been.

We’ll also find out whether or not the decision to end support for Windows XP on April 8th has seen a pick-up in new PC sales this quarter, or whether this forced decision has seen people move over to Apple Macs.

The company has also taken the fight to Sony in the gaming console market by cutting the price of its Xbox One console earlier this year in an attempt to drive up its market share, given that the PS4 is estimated to be outselling it by around two to one.

 As part of this new strategy Microsoft also included a new software bundle including the massively hyped TitanFall and if early reviews are any guide it appears to have had rather mixed reviews.