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4 Things That Can Go Right for Apple on Tuesday

Saturday - 4/20/2013, 7:45pm  ET

Apple will have plenty to prove as it heads into Tuesday's fiscal second-quarter report. The market isn't holding out for much, but that goes without saying. Shares of the tarnished tech tastemaker haven't traded this low since late 2011.

I went over four things that could go wrong with Apple's quarterly report on Thursday. Now let's turn the tables, reviewing the things that could turn the market's bearish perception around.

1. Earnings can beat expectations -- for a change
It's been an inauspicious start to the Tim Cook era. The company that routinely blew analyst profit targets away with ease while Steve Jobs was running the show has come up short more often than not lately. Apple has missed Wall Street's bottom-line estimates in two of the past three quarters, and three of the past five. Analysts have been lowering their projections in recent weeks, leading the smart money to wager on yet another miss.

Well, what if it doesn't play out that way?

We know that margins are contracting as consumers opt for cheaper Apple devices that the tech giant sells at smaller markups. Consider that Verizon's quarterly report on Thursday provided a glimpse of Apple's own quarter. It's great that 4 million of the 7.2 million smartphones Verizon sold were iPhones. Take that, Android! However, half of those 4 million devices were the older iPhone 4 and iPhone 4S smartphones that wireless carriers continue to sell for $100 to $200 less than iPhone 5 handsets.

Apple will earn less than it did a year earlier. All 49 analysts modeling the company see it that way. However, if Apple earns more than the $10.07 a share that Wall Street is currently targeting, it would indicate that margins don't have to be so lean on the cheaper hardware.

2. Revenue growth can beat expectations
With margin deterioration practically a lock, the market will wonder whether Apple can make up the difference in volume. It's not just profit estimates that have come in lower. Wall Street has been shaving down its top-line forecasts, too. Analysts who were initially expecting double-digit top-line growth at Apple are scaling back their numbers in light of unsettling third-party data. The average target now calls for just 8.4% revenue growth.

Ouch!

One of the reasons for the latest wave of downward revisions is that Apple suppliers are smarting. Apple shares took a hit on Wednesday after Cirrus Logic warned of a substantial net inventory reserve. Cirrus Logic's announcement revealed that it had too much inventory of a high-volume product. As an Apple supplier, the popular assumption is that Cirrus Logic is talking about Apple. Even though Cirrus Loigic also pointed out that the customer -- nudge, nudge, wink, wink, Apple -- was migrating to a newer Cirrus Logic component, the market began fearing the worst. Apple stuff isn't selling!

Well, Verizon's report shows that at least Apple iPhones are selling briskly. Tablets may be a harder sell, but never underestimate Apple's continuing penetration of the education market. It's no longer just about sales at the retail level. If Apple is able to beat top-line estimates, this would be an even bigger victory than beating on the bottom.

3. Apple can raise its dividend
Payouts aren't the safety nets that investors thought they would be at Apple. The stock is trading much lower than it was just before it initiated its dividend policy a year ago. When Apple shares peaked as the iPhone 5 hit stores, the stock was yielding 1.5%. The dividend hasn't changed, but a cascading stock price has the yield now all the way up to 2.7%.

Isn't that enough? Aren't we near the yield that investors were clamoring for when Apple's stock was peaking?

Investors are smart. A chunky yield isn't going to help if the fundamentals are deteriorating. However, not jacking up its dividend sends a worrisome message. What is Apple saving up for? Its balance sheet is flush with greenery, and even if most of it is locked up overseas, there's more than enough room for an increase.

A pop in payout may not woo as many income investors as the market believes it will, but the very act of doing so would indicate confidence in the company's future cash flow expectations. So, yes, boosting its payout on Tuesday -- 13 months after initiating its quarterly distributions -- should move the stock higher.

4. You can't spell "innovation" without "ovation"
My final bearish point on Thursday was that Apple could disappoint investors clamoring for something new.

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