Here’s What to Expect From Apple Earnings

The recent roller coaster ride on which Apple’s (NASDAQ:AAPL) stock has taken investors goes against its otherwise continuous upward trend of the last few months. With the company set to report second-quarter earnings on Tuesday, analyst predictions and expert commentary have ranged from the overly gung-ho to the overly dramatic. Of course, the stock’s performance has a lot to do with that much-awaited earnings report. However, Apple shares dropped 7 percent in October after the company missed Wall Street’s expectations for the first time in years, and yet they’ve recovered since then, up 45 percent in the last six months despite the recent sell-off.

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Whether to give projections much weight is up to you, but we’ve compiled a list of the biggest questions analysts are asking (and trying to answer) ahead of earnings:

1. Is Apple in bubble territory?

Apple’s stock bid goodbye to 2011 at a healthy $405, but bloated in the first three months of the new year to add almost 50 percent to its market value. On April 9, it reached an all-time high of $636.23. Analysts think the fall — the stock closed at $571.70 on Monday — was to be expected since such growth is simply unsustainable. Though investors wondered if the shares were ready for a sell-off, some analysts pointed out that all sharp price accelerations lead to a bubble ready to blow out at the first sign of pressure. “I think it was due for profit-taking,” Sterne Agee analyst Shaw Wu wrote in a note. “The stock has gone vertical.”

Other experts agree that the lofty level was unnatural considering the rest of the market, and ripe for a pause. “We believe this could be a simple ‘collapsing’ on its own weight given the year-to-date move of Apple up approximately 45 percent, while the S&P 500 has been up about 10 percent,” International Strategy & Investment Group analyst Brian Marshall said.

Other technology companies have had similar trajectories in the past decade or so, including Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), and Cisco (NADAQ:CSCO).

In short, it seems there’s little behind doomsday predictions: the stock is only behaving as stocks do.

2. Are sales likely to slow anytime soon?

BTIG analyst Walter Piecyk was the first naysayer for the company, who, to the amazement of many, downgraded the stock from Buy to Hold ahead of its recent decline. What was Piecyk’s reasoning? Apple’s biggest earnings driver, the iPhone, was likely to see a drop in sales, he said. The analyst reasoned that wireless carriers such as AT&T (NYSE:T) and Verizon (NYSE:VZ), having subsidized the company’s smartphone for years to encourage buyers, were going to stop taking those losses.

“Investors should take a breather and take a moment to consider the changing dynamics in the post-paid wireless industry, which has seen margins squeezed by the frequent upgrade activity of iPhone customers, and the sustainability of a $600 iPhone and possible need for a price cut,” he wrote. The idea was that carriers would now try to promote alternatives such as phones that run on Google’s (NASDAQ:GOOG) Android and Microsoft’s Windows systems, which often cost decidedly less.

Another rumor still floating around concerns the big-selling tablet. Reports that Apple may soon be launching a new, lower-margin “iPad mini,” which would cost only $250 and hurt sales of the traditional and more expensive iPad, are alive and well. However, with Apple expanding in growing markets like China, the expected launch of the new iPhone this fall, and reports that the long-awaited Apple TV may also be on its way, predictions that all hell will break lose seem overstated.

3. Will shares go to $1000 and beyond?

Topeka Capital analyst Brian White first created the big buzz earlier this month after dropping the four-figure mark. White declared a $1,001 target price for Apple’s shares, adding that “Apple fever is spreading like a wildfire around the world and we see no end in sight to this trend. Gene Munster’s Piper Jaffray supported that assertion, predicting a run to $1,000 by 2014. If that happens, Apple will become the world’s first trillion-dollar company.

At its top level of $636.23, Apple was close to overtaking Microsoft’s all-time high market capitalization for a U.S. company of $619 billion from December 1999. Average price targets dropped to just under $700, but were up around $750 on Monday afternoon. Some analysts say Apple’s shares remain fairly valued to slightly undervalued.

For now, whether Apple managed to keep up a profit margin of more than 50 percent for the most recent quarter is the most important question for those trying to decipher where the company’s stock is headed.