Apple's earnings report exceeded expectations and is already a "sure thing"? The market is more concerned about three unresolved questions

Author: Li Xiaoyin

Is Apple's earnings report already a "sure thing"? The real question is what will happen next.

After the U.S. stock market closes on May 1, Apple will announce its Q2 earnings report for the fiscal year 2025, which ends in March this year. According to news from the Wind Trading Desk, Morgan Stanley analyst Erik W Woodring and his team pointed out in a research report released on April 28 that Apple may deliver slightly better-than-expected results.

Morgan Stanley also stated that the market may have already anticipated Apple's robust financial data, the real focus lies in the "other everything" that the earnings report fails to address—tariff impacts and countermeasures, AI strategy, and the sustainability of iPhone growth—these factors will dominate market sentiment after the earnings report.

Q2 Earnings Report Expected to Slightly Exceed Expectations

Morgan Stanley expects Apple's Q2 revenue to reach $95.7 billion, with earnings per share (EPS) of $1.64, slightly higher than the market's general expectations of $94 billion in revenue and $1.61.

The report pointed out that due to the uncertainty of tariff policies, Apple has accelerated production, boosting device shipments and sales for the March and June quarters.

The report raised Apple's iPhone shipment forecast for this quarter by 3 million units to 54 million units, and the next quarter's iPhone shipment forecast was raised by 1.5 million units to 46 million units.

Secondly, the improvement in the foreign exchange environment supports performance. The report states that the negative impact of foreign exchange on revenue for the March quarter is expected to be 170 basis points, an improvement of 80 basis points from guidance, while the June quarter may bring a revenue boost of 120 basis points, which supports the slightly higher-than-expected revenue.

Lastly, the growth of the services business remains strong, with Apple's services business expected to grow 12% year-on-year in Q2, reaching $26.7 billion, which is basically in line with market expectations. App Store revenue performance meets expectations, while Google's TAC (Traffic Acquisition Cost) is about 1% higher than expected.

In terms of revenue guidance, Morgan Stanley expects Apple's guidance for the next quarter to be $89.3 billion, which is basically in line with market expectations. However, the firm's forecast for the gross margin for that quarter (45.4%) is about 120 basis points lower than the market consensus.

The report pointed out that this is mainly due to the potential impact of tariff costs included in the model. However, Morgan Stanley believes that this gross margin risk has largely been absorbed by buyers Apple will update its capital return plan in this earnings report. The report expects that Apple will announce an increase of $110 billion in stock repurchase authorization (maintaining a repurchase pace of about $25 billion per quarter), and dividends will increase by 4%, which is consistent with operations in April 2024.

The Real Test: Tariffs, AI, and Growth Fog

Compared to relatively "transparent" financial numbers, the market is more concerned about how Apple’s management will respond to a series of unresolved strategic issues.

Morgan Stanley believes that the earnings report itself may not be a key catalyst, and investors should focus on the following key questions that will determine Apple's medium to long-term development direction:

1. Tariff Risks: How will Apple respond to short-term and long-term supply chain tariff risks? What specific impact will this have on costs and profit margins? Will product prices be raised in the future to pass on costs?

2. Actual Demand: Is the recent strong shipment a reflection of accelerated end-user demand, or is it merely due to stockpiling to avoid tariff risks?

3. AI Progress: When can we expect to see an updated version of Siri? Has Apple’s AI strategy been adjusted due to recent personnel changes?

4. Political Relations: What is Apple’s current relationship with President Trump?

The report concludes that until clearer answers to these key questions are obtained, Apple’s stock price may remain in a range-bound fluctuation, with a price floor set at $170 and a new target price of $235 (i.e., the upper range).

Currently, Tariff Impact is the Biggest Risk Point

The volatility of tariff policies poses challenges for forecasting. The report predicts that without mitigation measures, the new tariff assumptions will have a negative impact of about 3 percentage points on Apple’s gross margin starting from the September quarter.

However, the report also states that Apple will partially offset the impact by sharing costs with the supply chain, accelerating in-house production of components, and raising product prices. Particularly for the iPhone, the report expects that Apple will not directly raise prices but may eliminate the low-capacity storage version when the iPhone 17 is released, using the nearly 90% incremental profit margin of the high-capacity version to absorb tariff costs while minimizing the impact on sales.

Based on this, the report expects Apple’s gross margin for this quarter to be 47% or above (in line with or better than the company’s guidance of 46.5%-47.5%), but the gross margin for the next quarter is expected to drop to 45.4%, a sequential decline of 160 basis points (far exceeding the past five-year average of -3 basis points), and about 120 basis points lower than market consensus. From the September quarter to fiscal year 2028, the forecasted overall gross margin for the company is about 60 basis points lower than it would be without considering the new tariffs.

"Eating the Grain of the Next Year"? Strong First Half May Indicate Weak Second Half

Morgan Stanley also clearly pointed out in the report that no substantial acceleration in end-user demand has been observed; the recent strong shipment volume is mainly due to Apple increasing production and shipments in advance to avoid tariff risks However, this "advance inventory" may indicate an overdraft of future demand.

The report thus lowered the iPhone shipment forecast for the second half of 2025, reducing it by 5.5 million units compared to the model before the tariff adjustment (a decrease of 4 million units in the September quarter and 1.5 million units in the December quarter). At the same time, the cost pressure caused by tariffs will continue to affect the product gross margin in the second half of the year (expected to be 120-130 basis points lower than the original model).

Overall, the report believes that for 2025, "a stronger first half means a slightly weaker second half." Morgan Stanley currently predicts Apple's revenue and EPS for the second half to be 5-6% lower than the market consensus