Can Apple, Inc.’s iPhone Segment Keep Up Its Momentum in Q3?

Apple‘s (NASDAQ: AAPL) iPhone sales are always an important metric for investors to watch when the company reports its quarterly results. Accounting for 62% of its trailing-12-month revenue and an even larger portion of profits, the iPhone is still integral to the tech giants’s overall business — even as its services and other products segments continue to grow rapidly.

Recently, iPhone revenue has been rising by double-digit rates on a year-over-year basis, serving as a significant catalyst for the company’s top and bottom lines. Can this iPhone X-driven momentum persist in Apple’s third quarter of fiscal 2018?

Image source: Apple.

Rising iPhone sales

The iPhone segment has been on a roll since the company introduced the iPhone 8, 8 Plus, and X last fall. The iPhone X, in particular, has seen significant customer adoption. “Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter,” said Apple CEO Tim Cook in the company’s second-quarter press release.

Corresponding to the fourth-calendar quarter of 2017 and the first calendar quarter of 2018, Apple’s first and second quarters of 2018 represent the first two full quarters of availability of the latest iPhones. In other words, the performance of the iPhone segment during these periods helps investors gauge how well Apple’s newest iPhones are doing. With iPhone revenue rising 13% and 14% in Apple’s first and second quarters of fiscal 2018, Apple investors have had good reason to be optimistic.

But as new iPhones begin to age during their first year of availability, there’s always a risk that year-over-year growth rates could come down.

Fortunately, Apple’s quarterly revenue guidance typically proves to be conservative, making management’s outlook for a given period a good barometer of what to expect from the iPhone. So investors aren’t totally in the dark about what to expect from iPhone sales in Q3.

Apple’s guidance implies more strong growth for iPhone

For its fiscal third quarter, Apple guided for revenue to increase between 13% and 18% year over year. Since Apple’s revenue usually comes in somewhere between the middle and top end of its guidance range, management likely expects total revenue to rise at a similar rate to the 16% year-over-year increase it saw in its fiscal second quarter. And since the iPhone segment drives the bulk of the company’s top line, iPhone revenue will likely see growth similar to the growth seen in Q2.

Applying Apple’s second-quarter year-over-year iPhone revenue and unit sales growth rates to the company’s third quarter, this would put third-quarter iPhone revenue and unit sales at about $28.3 billion and 42.3 million, up from $24.8 billion and 41 million in the year-ago quarter.

This method of forecasting third-quarter iPhone sales, of course, may prove to be too rudimentary to serve as an official forecast. But it does make an important point: iPhone revenue is likely to continue its upward march on a year-over-year basis in the third quarter. And considering that Apple trades at just 18 times earnings, the company’s ongoing growth in iPhone revenue is a positive trend worth giving some weight.

Of course, iPhone revenue can’t continue upward forever. So even if Apple does post year-over-year growth in iPhone revenue in Q3, investors will want to look to the company’s revenue guidance and any commentary from management to get more insight into how sustainable this trend is.

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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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