Tim Cook, CEO of Apple Inc., speaks during the Apple Worldwide Developers Conference at the Apple Park campus in Cupertino, California, United States, Monday, June 6, 2022.
David Paul Morris | Bloomberg | Getty Images
Apple releases its results for the quarter ended in June on Thursday.
The third quarter of Apple’s fiscal year is typically the company’s smallest sales. The quarter is in the latter half of the annual iPhone refresh cycle, with investors starting to look forward to the release of a new model, which will boost revenue from late September or October.
This year, analysts and investors will be watching Apple’s earnings closely in the face of many new macro trends, including declining consumer confidence, rising interest rates and decades-high inflation.
So far, Apple’s sales have remained strong, in part because its customers are a fairly affluent group. But any signs that people are postponing purchases of Macs and iPhones due to fears of inflation or recession could have implications for the wider economy.
Apple also has significant exposure to China, both as a market to sell its products and as a country where most of its products are assembled. Several of the company’s factories in China saw production shifted or suspended at times during the June quarter due to Covid-19 lockdowns.
Analysts polled by FactSet expect Apple to report revenue of $82.8 billion, which would represent less than 2% growth from the same quarter last year and the weakest quarterly increase since the start of the pandemic.
Analysts also expect earnings of $1.16 per share, which would represent a decline of 10.7% on an annual basis. Gross margin will also decline from 43.7% last quarter — a historically high level for Apple — to between 42% and 43%, the company said in April.
Supply issues and blockages in China
In April, Apple’s story was not about demand, it was about supply. “Right now our main focus, frankly, is on the supply side,” Apple CEO Tim Cook told analysts.
Apple warned of a $4 billion to $8 billion drop in revenue stemming from supply issues, including chip shortages and production issues. Some analysts say the iPhone maker will report that it has managed the supply chain well and the impacted revenue will end up at the lower end of its forecast.
“We believe the company managed its supply chain better than it expected a quarter ago as it continued to gain market share in an otherwise challenging quarter for smartphones and PCs,” Deutsche Bank analyst Sidney Ho wrote in a recent note.
That could be good for iPad sales, which have taken a hit in recent quarters as the company has prioritized parts for iPhones and other products.
“We also expect iPad sales to improve in part due to improved supply and believe Apple’s commentary on the June quarter’s $4-8 billion supply was more likely to be at the lower end of this range,” wrote T. Michael Walkley, analyst at Canaccord Genuity. note this month.
Apple has been struggling with shutdowns in urban areas of China, including Shanghai. Covid restrictions could have hurt Apple’s iPhone sales in China at the start of the quarter, but could have boosted sales in June as people came out of lockdown ready to spend.
Analysts polled by FactSet predict Apple sales in Greater China will be around $13.79 billion, down from $14.56 billion in sales a year ago. .
September Term Application
Investors will also be listening carefully to see if Apple is signaling consumer weakness in any region of the world.
“We believe the outlook/demand comments will be front and center as we try to assess the impact to Apple’s earnings should the consumer/macro environment slow down,” the statement said. Wells Fargo analyst Aaron Rakers in a note.
Sales of smartphones and PCs slowed, but Apple was less affected as the high-end market, where it sells, was more resilient. TSMC, Apple’s main processor supplier, warned that demand for PCs, smartphones and consumer electronics is trending weaker.
Also, if Apple signals that demand is slowing, that would be another signal of a potential recession.
Rod Hall of Goldman Sachs notes that “high-end demand could start to weaken in Europe, due to high inflation and falling consumer confidence.”
Apple hasn’t announced a slowdown in hiring or other cost controls, unlike Alphabet, Tesla, Microsoft and Meta. But Apple is quietly slowing its hiring pace, according to Bloomberg News, and some analysts believe the company’s management may be talking about its spending control strategy.
The tech giant has not provided guidance since the start of the pandemic, citing uncertainty, and some expect that trend to continue.
“While we don’t expect Apple to guide F4Q22, the company is likely to provide qualitative feedback as it has for several quarters,” Rakers wrote.
Can Apple remain a safe haven?
Overall, analysts are still confident that Apple is an efficient company with a solid cash balance, loyal customers and competitive products.
But can it remain a safe haven as other tech stocks fall and markets pull back? Apple is down nearly 15% so far in 2022, but that’s better than the Nasdaq Composite, which is down 18%.
“Apple remains one of the top consumer electronics companies with the ability to invest across cycles, and with more than 60% of revenue of a more basic nature, strong brand loyalty, and continuous product/service innovation. , we believe it is better insulated against its peers during a downturn,” Morgan Stanley’s Huberty wrote.
One of the keys for Apple investors in a downturn will be growth in its services business, which makes overall hardware sales growth less crucial. Apple’s services, which include monthly subscriptions, payment fees, warranties, Google search license fees and iPhone App Store revenue, also offer higher margins than its core hardware business.
Apple’s services business is expected to grow 12% year on year, according to analysts polled by FactSet.
That’s a slower growth rate than the 17% annualized growth it posted in the second quarter, and a significant decline from the 27% growth Apple saw in its services business in 2021.
JP Morgan’s Samik Chatterjee believes Apple’s share buyback plan will support the stock, even if its earnings are seen as disappointing. Apple’s board authorized $90 billion in share buybacks and additional dividends in April.
“We believe the resilience of earnings estimates amid deteriorating macroeconomics, including both inflation and unfavorable currency effects, will continue to drive investors to favor Apple with strong cash generation and a healthy balance sheet. which will allow it to offset any earnings dilution due to the macro through buybacks,” Chatterjee wrote in a note.