Tim Cook, CEO of Apple Inc., speaks during the Apple Worldwide Developers Conference at the Apple Park campus in Cupertino, California, U.S., on Monday, June 6, 2022.
David Pablo Morris | Mayor Bloomberg | fake images
Apple reports earnings Thursday for the quarter ending in June.
The third quarter of Apple’s fiscal year is typically the company’s lowest for sales. The quarter is in the back half of the iPhone’s annual refresh cycle, as investors begin to expect the launch of a new model, which boosts revenue starting in late September or October.
This year, analysts and investors will be watching Apple’s earnings closely in the face of many new macroeconomic trends, including decline in consumer confidencegrowing Interest rates Y decades of high inflation.
So far, Apple’s sales have remained strong, in part because its customers are quite an affluent group. but any signs People postponing Mac and iPhone purchases because of inflation or recession fears could have implications for the entire economy.
Apple also has significant exposure to China, both as a market to sell its products and the country where most of its products are assembled. Several of the company’s factories in China changed or suspended production at times during the June quarter due to Covid-19 lockdowns.
Analysts surveyed by FactSet expect Apple to report $82.8 billion in sales, which would represent less than 2% growth from the same quarter last year and the slowest quarterly increase since the start of the pandemic.
Analysts also expect $1.16 in earnings per share, which would represent a 10.7% year-over-year decline. Gross margin will also decline from 43.7% last quarter (Apple’s all-time high) to between 42% and 43%, the company said in April.
Supply problems and blockades in China
In AprilApple’s story wasn’t about demand, it was about supply. “Right now, our primary focus, frankly speaking, is on the supply side,” Apple Chief Executive Tim Cook told analysts.
Apple warned of a $4 billion to $8 billion revenue hit stemming from supply issues, including chip shortages and production issues. Some analysts say the iPhone maker will indicate that it managed the supply chain well and that the impact on revenue will end up at the low end of its guidance.
“We believe the company managed its supply chain better than planned a quarter ago, while continuing to gain share in a difficult 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 prioritized parts for iPhones and other products.
“We also anticipate an improvement in iPad sales in part due to improved offerings and believe negative comment on Apple’s $4 billion to $8 billion offering for the June quarter was more likely in the lower end of this range,” Canaccord Genuity analyst T. Michael Walkley wrote in a note this month.
Apple has dealt with closures in urban areas of China, including in Shanghai. Covid restrictions may have affected Apple’s iPhone sales in China earlier in the quarter, but could have boosted sales in June as people emerged from lockdown ready to spend.
Analysts surveyed by FactSet predict Apple sales in Greater China to be around $13.79 billion, down from $14.56 billion in sales a year ago.
September Quarter Demand
Investors will also be watching to see if Apple is signaling consumer weakness in any region of the world.
“We believe that outlook/demand commentary will be the key focus as we try to gauge the impact to Apple’s earnings in the event of a slowdown in the consumer/macro environment,” Wells Fargo analyst Aaron Rakers said in a note.
Smartphone and PC sales have slowed, but Apple has been less affected because the high-end market, where it sells, has been more resilient. TSMC, Apple’s main processor supplier, warned that demand for PCs, smartphones and consumer electronics tends to be weaker.
Also, if Apple signals that demand is slowing, it would be another sign of a possible recession.
Goldman Sachs’ Rod Hall notes that “high-end demand may be starting to weaken in Europe driven by high inflation and falling consumer confidence.”
Apple has not announced a slowdown in hiring or other cost controls, unlike Alphabet, Tesla, MicrosoftY Goal. But Apple is quietly slowing down its pace of hiring, according to news from Bloombergand some analysts believe that the company’s management could talk about its strategy to control expenses.
The tech giant has provided no guidance since the start of the pandemic, citing uncertainty, and some expect this trend to continue.
“While we don’t expect Apple to lead F4Q22, the company is likely to provide qualitative feedback as it has for several quarters,” Rakers wrote.
Can Apple still be a safe haven?
Analysts are still generally confident that Apple is an efficient company with a strong cash balance, loyal customers and competitive products.
But can it remain a safe haven while 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 best consumer electronics companies able to invest through cycles, and with more than 60% of revenue of a more basic nature, strong brand loyalty and continuous product/service innovation, we believe that is better insulated relative to its peers during a recession,” Morgan Stanley’s Huberty wrote.
One key for Apple investors in a downturn will be the growth of its services business, which makes overall growth in hardware sales less crucial. Apple’s services, which include monthly subscriptions, payment fees, warranties, Google license search fees and revenue from the iPhone app store, also offer higher margins than its core hardware business.
Apple’s services business is forecast to grow 12% annually, according to analysts surveyed by FactSet.
That’s a slower growth rate than the 17% annualized growth it posted in its second quarter, and a significant slowdown from the 27% growth Apple posted in its services business in 2021.
JP Morgan’s Samik Chatterjee believes Apple’s plan to buy back shares will boost shares, even if its earnings are seen as disappointing. apple board $90 billion authorized in additional share buybacks and dividends in April.
“We believe that the resilience of earnings estimates in the context of deteriorating macroeconomic conditions, including inflation and currency headwinds, will continue to drive investors to favor Apple with strong cash generation and a balance sheet that will allow it to offset any dilution.” gains due to macro via buybacks,” Chatterjee wrote in a note.