With Big Tech Earnings on Deck, This Stock Could be Vulnerable — Barrons.com
Dow Jones Newswires ·
By Martin Baccardax
Markets are braced for earnings from megacap tech companies, with updates from four stocks that comprise around a fifth of the S&P 500's total market value expected over the next two trading sessions.
One of those stocks, however, isn't likely to be measured by the same yardstick that investors are deploying to calibrate their progress in artificial intelligence. And that could mean it has the most to lose.
Apple will publish earnings for the three months through June, its fiscal third quarter, after the close of trading on Thursday. Analysts are looking for revenue to rise around 4% from last year to $89.2 billion, based on FactSet data. Earnings, however, are only expected to grow by around half that pace.
What won't be in focus is the company's capital spending plans, largely because they aren't focused on AI. Apple's effort to realign its supply chain by moving some operations from China to India, while ramping up investments in the U.S., is more of an issue for investors than its spending on the hot new tech.
"It's not really part of the AI narrative in the same way as Amazon or Microsoft, and investors are fretting over tariffs, supply chains, and China," says Saxo Bank strategist Neil Wilson. "Apple's AI story has disappointed thus far, and this quarterly update is unlikely to produce a fresh catalyst on that front."
The group has cut deals with ChatGPT maker OpenAI in the U.S., as well as with Alibaba and Baidu in China, but its overall capex is likely to only reach $12 billion this fiscal year. That compares with the $70 billion to $100 billion penciled in for Amazon.com, Meta Platforms, Microsoft, and Alphabet.
Investors have been less impressed. With a loss of more than 15% this year, Apple has lost nearly $600 billion in market value. Among the Magnificent Seven stocks, only Tesla has fallen more sharply, with a decline of a bit more than 20%.
Instead of focusing on AI spending, investors are likely to focus on the impact tariffs will have on the company's cost base, which in turn narrows its profit margin. In early May, CEO Tim Cook put that figure at around $900 million for the June quarter alone.
Bank of America analysts see that figure rising to $1 billion over the three months ending in September, based on the current rate of tariffs charged on goods imported from China.
The pinch to margins in its flagship iPhone business will also underscore the group's lack of progress in developing a successful consumer-facing AI tool. The company hasn't impressed in terms of infusing the new technology into its fast-growing services division, either.
The combination of tighter margins and a lack of visible progress on AI could leave the stock vulnerable to an outsize reaction if its fourth-quarter sales forecast falls short of the $97.6 billion Wall Street has penciled in.
New iPhone models, expected in September, could boost holiday-quarter forecasts, but consumer-spending trends are moving in the wrong direction at present. The appetite for devices that don't include AI could be limited.
"iPhone form factor changes have helped drive higher replacement rates in the past," said BofA Securities research analyst Wamsi Mohan in a note earlier this week. "We expect the slim iPhone to replace the Plus model from last year and be priced $100 higher vs the Plus model."
Looking further ahead, J.P. Morgan sees the group launching a foldable iPhone in September of next year, but predicts the $65 billion market that could create won't really take off until late 2027.
Although Cook told investors in January that its "hybrid model," which leverages partnerships over enormous capital outlays, "continues to serve us well," the lack of progress in AI could compel Apple to leapfrog its way into the narrative through a technique it rarely deploys: a major acquisition.
Perplexity AI — a company that uses third-party large language models to deliver crisp search results — is perhaps the most likely target. It is valued at around $14 billion.
News Corp, the owner of Barron's publisher Dow Jones, has sued Perplexity, alleging copyright infringement. News Corp also signed a multiyear partnership with OpenAI in March 2024.
"The reality now is that AI technology on the enterprise and consumer landscape are happening at such a rapid pace [that] Apple will not be able to catch up with an internally built solution to turn Siri into the next AI gateway for consumers," said Wedbush analyst Dan Ives in a recent Apple note.
BofA's Mohan thinks that absent a big takeover deal, Apple is "three-plus years away from delivering a truly modern AI assistant, long after Google and others have integrated such tech."
The group delayed an AI-powered upgrade for its Siri assistant, expected this year, to the spring of 2026, according to multiple media reports.
"Apple's ability to drive future growth depends on delivering new capabilities and products on time," Mohan said. "If deadlines keep slipping, that potentially delays revenue opportunities and gives competitors a larger window to attract customers."
Write to Martin Baccardax at [email protected]
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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Dow Jones Newswires