by Emily Barry
Earnings Preview: Amid reports of production cuts to the new iPhone 14 family of smartphones, Wall Street will be watching to see how inflation has impacted spending on expensive Apple devices and what executives think about the holiday season .
Apple Inc. executives said last quarter they had yet to see economic pressures affect consumer demand for the iPhone, but investors will need more convincing this time.
The consumer electronics giant continues to be dogged by reports that executives are limiting production of new iPhones ahead of Thursday’s fiscal fourth-quarter earnings report, and that has fueled concerns about declining demand for the expensive hardware. in an inflationary climate. While Apple (AAPL) has refused to increase the prices of its latest iPhone models, its prices remain high across the board, from $799 for the cheapest iPhone 14 to $1,599 for the most expensive iPhone 14 Pro Max.
There is debate about what the reported production cuts actually mean. A recent report, from The Information, said that Apple told “at least one manufacturer in China to immediately halt production of iPhone 14 Plus components” while the company reassesses demand for the device. Such a trend could indicate spending pressure among low-income customers who might normally opt for one of the entry-level iPhones, or it could simply reflect the lack of significant feature improvements on those specific devices relative to the Pro models.
Read: Apple’s alleged production cut ‘overshadows underlying story’ of strong iPhone 14 Pro demand
Additionally, a Bloomberg News report from late September indicated that Apple was refusing to go ahead with planned production increases for the iPhone 14 family, instead targeting production levels similar to last year. Apple producing just as many phones as it did last cycle would hardly be momentous, but if the company did adjust estimates recently, it could be seeing signs of consumer spending that have ramifications for the company’s broader portfolio.
“Historically, Apple’s fiscal fourth quarter earnings results are not particularly important, but forward guidance/commentary is,” Bernstein analyst Toni Sacconaghi wrote ahead of Apple’s Oct. 27 report. . That appears to be especially the case in the current economic climate.
While Sacconaghi doesn’t think the company will provide traditional quantitative guidance (management has offered something more along the lines of “guidance” since the pandemic began), he predicts that Apple’s “qualitative comments on the demand environment may, ultimately shape investor sentiment more.”
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The panic over potential production cuts appears to be at odds with other seemingly healthier demand indicators, according to Evercore ISI analyst Amit Daryanani. He noted that while lead times for pro-level models have been shrinking internationally, they were flat in the US at about 25 days as of his Oct. 18 note to customers. The phones went on sale starting in September.
“Demand has remained strong and contrasts sharply with recent concerns about a slowdown,” he wrote. Additionally, Apple could be achieving higher average selling prices given indications that Pro devices are selling better than cheaper base-level ones.
Here’s what to look for in the company’s fiscal fourth quarter report.
what to expect
Earnings: Analysts tracked by FactSet expect Apple to post $1.27 per share in earnings for the September quarter, up from $1.24 per share a year earlier. At Estimize, which sources projections from hedge funds, academics and others, the median estimate calls for $1.30 in earnings per share.
Revenue: The FactSet consensus calls for $88.8 billion in revenue, up from $83.4 billion a year earlier. Those who contribute to Estimize expect an average of $88.6 billion.
Analysts tracked by FactSet expect Apple to post $43.4 billion in iPhone revenue, up from $38.9 billion a year earlier. They’re also looking at $7.7 billion in iPad revenue and $9 billion in Mac revenue, both of which would mark declines from the prior year’s figures. The company posted $8.3 billion in iPad revenue and $9.2 billion in Mac revenue during the same period in 2021.
Analysts project $8.9 billion in revenue from wearables, home and accessories, up from $8.8 billion a year earlier. And they are calling for services revenue to top $20 billion for the first time at $20.1 billion. Apple posted $18.3 billion in revenue for that category a year ago.
Stock market movement: Apple shares have gained after just three of the company’s last 10 earnings reports. The stock is down 19% year-to-date, while the Dow Jones Industrial Average, which features Apple as a component, has lost 17% and the S&P 500 index is down 23%.
Of the 41 analysts tracked by FactSet covering Apple stock, 32 have buy ratings, seven have hold ratings and two have sell ratings, with an average price target of $143.39.
What else to consider
A key theme in earnings reports this cycle is the negative impact of the stronger US dollar. While Apple’s management team predicted about three months ago that the exchange rate could have a negative 600 basis point impact on sales growth in September, DA Davidson analyst Tom Forte notes that “the US dollar strengthened against a basket of currencies that we believe are important to Apple” during the quarter. These include the British pound, the Canadian dollar, the euro, and the Japanese yen.
He’ll be watching for signs of a “higher-than-expected headwind due to the strength of the US dollar” when Apple releases the results.
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Morgan Stanley’s Erik Woodring is interested in the effects of an extra week in Apple’s December quarter. He noted that in fiscal 2017, the last time Apple had a 14-week holiday quarter, “both products and services grew at a faster than seasonal rate given the additional week of holiday included in the month of December.” “.
Consensus estimates may not fully reflect Apple’s potential to benefit from this dynamic.
Overall, he sees controversy on Wall Street over how Apple’s December quarter will play out, which is why the company’s “directional” outlook for the period will be “critical” in his opinion.
Woodring will also keep an eye on expectations for the path of services in the December period, “although most investors are aligned that service revenue growth should accelerate” in this quarter.
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Barclays analyst Tim Long believes Apple’s iPad and Mac categories may beat expectations for the latest quarter, driven in part by improving supply. The computer business is also benefiting from shipments of new M2 Macs.
He is less optimistic about the results of the services and wearables categories, noting that “App Store continues to weaken,” partly due to macroeconomic issues, but also as a result of regulatory pressure in China. For the wearables business, he says such products “are seen as more discretionary and have more macro sensitivity.”
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