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).
I believe that the company’s weakness in performance is going to be temporary because the shift to a subscription model with Office 365 should have a temporary effect on earnings. Likewise, the weakness from Windows 8 could be offset once Microsoft ends its support for Windows XP. Analysts expect the company to grow earnings by 8.2% in the next fiscal year.
Google Inc (NASDAQ:GOOG) struggles to sustain revenue growth
Source: Statista
I have to admit I wasn’t terribly surprised with Google Inc (NASDAQ:GOOG)‘s declining revenue growth. The company’s revenue growth rate was partially inflated in 2012 by its acquisition of Motorola Mobility. The year-over-year comparisons aren’t exactly accurate. Due to the growth of mobile, the company also experienced difficulties with costs-per-clicks (Google AdSense), which declined by around 6% year-over-year. The decreasing costs-per-clicks weighed heavily on the company’s operating margin, which fell from 31% to 26% year-over-year.
Investors and analysts were somewhat willing to pardon the weaknesses in display advertising because of Google Inc (NASDAQ:GOOG)’s growth in its Android Play Store business, which was up by 138% year-over-year.
The decline in display advertising caused net income to fall year-over-year. As a result, analysts on a consensus basis projected earnings growth of 12% for the full fiscal year.
Conclusion
It seems that Apple is the shining beacon of hope amongst the technology stalwarts. If Apple Inc. (NASDAQ:AAPL)’s earnings guidance fails to come through, it can indicate that growth expectations were too high for the tech sector as a whole.
Both Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) provided decent–if not awful–guidance, so it is up to Apple to change the prevailing market sentiment in technology stocks. Let’s not forget that in the next quarter Apple Inc. (NASDAQ:AAPL) is set to release its next generation iPhone device. So if guidance stinks, kiss goodbye the technology rally.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT).
The article Apple’s Earnings Are the Last Line of Defense for Technology Stocks originally appeared on Fool.com.
Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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