Apple's Q2 Earnings to Watch: AI, Services, and Tariffs

Apple shares have been under pressure YTD due to slowing growth and a lofty valuation. As Q2 earnings approach, investors will be watching for AI initiatives and services strength to offset concerns over modest growth and external pressures like tariffs. With a high P/E, Apple needs a strong quarter to prove its premium multiple is warranted.

As Apple Inc. (AAPL) prepares to release its Q2 earnings, investors are closely monitoring the company's ability to navigate external pressures and internal challenges. The tech giant has been under pressure year-to-date (YTD) due to slowing growth and a high price-to-earnings (P/E) ratio, which has led to a lofty valuation [1].

Wall Street expects Apple to post a 4.2% rise in revenue for the April-June quarter to $89.34 billion. However, the focus will be on how the company plans to adjust to a landscape that has turned its global supply chain, long a strength, into a potential liability [1]. US President Donald Trump has targeted Apple for its reliance on overseas manufacturing, threatening 25% tariffs on foreign-made iPhones [1]. To mitigate the impact, Apple shifted production of US-bound iPhones to India, which has led to a significant increase in smartphone production in the country [1].

Despite the tariff headwinds, analysts expect the strategy to help Apple limit the hit from tariffs to well below the $900 million it had estimated in May [1]. However, analysts caution that the company is still at risk due to the ongoing trade dispute [1].

Sales of iPhones are expected to have risen 2.2% in Apple's fiscal third quarter, driven by an improvement in demand in China, Apple's third-largest market [1]. The company has also benefited from strong growth in services revenue, which is expected to rise to 10.7% in the April-June period [1].

However, concerns remain over Apple's cautious approach to artificial intelligence (AI). The company has been slow to roll out its Apple Intelligence suite, including a ChatGPT integration, and a long-awaited AI upgrade to Siri has been delayed until next year [1]. This has fueled concerns that Apple is sitting out what could be the industry's biggest growth wave in decades [1].

In contrast, Meta Platforms Inc. (META) has been leveraging AI to improve the potency of its platform offerings, reaching more than 3.43 billion people daily [2]. The company expects to invest significantly more in developing more advanced models and AI services in the coming years [2].

ServiceNow Inc. (NOW) has also been leveraging AI and machine learning technologies to boost the potency of its solutions, with AI Pro Plus deal counts up more than 50% sequentially [2]. The company has been benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation [2].

As Apple's earnings approach, investors will be closely watching for signs of growth in AI initiatives and services strength to offset concerns over modest growth and external pressures like tariffs. With a high P/E, Apple needs a strong quarter to prove its premium multiple is warranted.

References:
[1] https://m.economictimes.com/tech/technology/apple-earnings-under-pressure-from-tariffs-slow-ai-roll-out/articleshow/122995452.cms
[2] https://www.nasdaq.com/articles/top-research-reports-apple-meta-platforms-servicenow