With Apple's (AAPL -4.33%) quarterly earnings results less than two weeks away, it's a good time for investors planning on watching the report to review their expectations for the quarter. While the results will be important for a number of reasons, one area in particular will likely get extra attention when the company reports: Apple's guidance for its next quarter, or fiscal Q2.
The tech giant's guidance will give investors a better idea as to whether or not the company can hold up against its tough comparisons in the year-ago quarter.
Will iPhone sales decline?
Rewind to Apple's second fiscal quarter of 2015. Revenue soared 27% compared to the second quarter in 2014, representing enormous growth for the world's most valuable company. Driving the growth was the company's latest iPhone lineup, which included the 6 and 6 Plus. Apple's foray into smartphones with larger displays was proving to be a major catalyst for the company during the year. iPhone unit sales were up 40% from the year-ago quarter, and iPhone revenue was up 55% from the year-ago quarter.
Now, here we are, heading into Apple's first-quarter results, where investors will get their first glimpse at management's expectations for the second quarter. Can Apple live up to the huge success it had in the year-ago quarter?
The big question about Apple's guidance, therefore, is whether or not the company will be able to avoid guiding for a year-over-year decline in sales during Q2. And more specifically, guidance will provide insight into Apple's expectations for its iPhone business. With Apple's iPhones representing about 63% of the company's revenue, Q2 iPhone sales will need to rival sales in the year-ago quarter for the company to be able to avoid reporting a year-over-year decline in revenue growth for the quarter.
If the tech giant guides for similar revenue as it reported in the year-ago quarter, then investors will know the company's latest iPhone cycle is performing well in the marketplace. If, on the other hand, the company guides for a year-over-year decline in revenue, investors will know Apple is having trouble living up to its big results last year.
Putting Apple's guidance into perspective
Even if Apple guides for a year-over-year decline in Q2 revenue, investors should rest easy. For a company that derives 63% of its revenue from a single product category, this sort of volatility in revenue growth is bound to occur -- especially since Apple reported 27% year-over-year revenue growth in its year-ago quarter.
But the greatest reason Apple investors shouldn't sweat volatility in revenue is because of the company's wildly conservative valuation. Currently trading at less than 11 times earnings, business growth over the long haul would be like icing the cake; net income growth isn't priced into the stock at these levels. Share repurchases alone could easily drive around 9% annualized EPS growth, even if the company's net income peaked where it is now.
So, I'll be watching guidance when Apple reports earnings this month. But as an investor with a time horizon well beyond five years, I'm going to need far more than a single quarter's data to conclude that the tech giant, along with its massive user base of extremely loyal customers, is a business in decline.