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Apple Inc. (AAPL)’s Earnings Are the Last Line of Defense for Technology Stocks

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Going into Apple Inc. (NASDAQ:AAPL)‘s earnings announcement almost every analyst is anticipating poor results. Thankfully the bar is set low for the quarter, which may end up boosting the stock.

International strategy experiencing some limitations

Demand for high-end phones is declining in the United States. However, sales of these devices could potentially pick up from emerging markets like Brazil, Russia, India, and China. The problem with the emerging markets is the quality of the networks, as 2G and 3G are common in many emerging market economies.

Source: GSA

The GSA map above is slightly misleading because even in countries with 4G LTE certain mobile carriers have partially built up networks, and the use of 4G LTE is mostly concentrated in city centers. For example, most of the eastern corridor of the United States will have 4G LTE, but rural parts of North America will not have it. Likewise, 3G connectivity is patchy at best in China. Southeastern China (Beijing, Shanghai, and Hong Kong) is loaded with 3G because of the differences in discretionary spending and average income. But rural China is not covered with 3G networking whatsoever.

So for Apple Inc. (NASDAQ:AAPL)’s international smart phone strategy to work, it needs to have three things: discretionary spending, network quality, and distribution. Apple has limited distribution in China, as it still has not been able to sign a contract with China Mobile Ltd. (ADR) (NYSE:CHL). Assuming the company signs a contract with China Mobile Ltd. (ADR) (NYSE:CHL), it still needs to offer a low-end device so it can properly target the amount of discretionary spending in China. The network quality doesn’t even offer the justification of owning a 4G LTE capable device, so the high-end segment isn’t going to grow until this has been addressed by the mobile carriers in China. As a result of these difficulties, Apple Inc. (NASDAQ:AAPL)’s China segment was only able to grow revenues by 8% year-over-year in the first quarter of 2013.

The upside to China is that there’s a lot of potential. Once discretionary spending improves, network quality reaches 4G LTE, and China Mobile Ltd. (ADR) (NYSE:CHL) partners with Apple, the growth rates in Apple’s Chinese segment should be similar to the 19% year-over-year revenue growth that Apple Inc. (NASDAQ:AAPL) currently enjoys in Japan.

Low expectations for the current quarter

The company provided guidance of $33.5 billion to $35.5 billion for the current quarter. The company believes that revenues are likely to be flat because there are no upside catalysts in the third quarter (which ends on June 30). The company managed to win a T MOBILE US INC (NYSE:TMUS) contract, but the effects may not be enough to offset the cannibalization caused by the iPad Mini. Also, the added growth from T MOBILE US INC (NYSE:TMUS) may have already been factored into the guidance for the current quarter.

Investors and analysts will be watching the earnings guidance provided by the earnings release. If the guidance is good, the stock should be able to stage a pretty strong bounce.

Microsoft a struggling giant

Microsoft Corporation (NASDAQ:MSFT recently reported earnings, and the news was terrible. The company had issues due to its console refresh cycle, Office 365 conversion, and Windows 8 licenses. The falling demand for PC shipments is largely driven by low-end tablet devices like the Apple iPad Mini.

Source: Statista

The demand for computers has consistently declined following the release of tablet devices. Tablet devices are generally cheaper to produce, and as a result, are expected to become the entry-level computing device in emerging market economies. Because of this, Microsoft Corporation (NASDAQ:MSFT) has shifted its focus from computers to mobile. The company formalized this shift in strategy through its One Microsoft announcement, which boosted the value of the stock. But when the company missed the consensus earnings per share estimate of $0.75, the stock declined drastically (Microsoft Corporation (NASDAQ:MSFT) reported $0.66 in earnings per share).

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