The iPhone 12 and iPhone 12 Pro cellphones.
Ming Yeung/Getty ImagesApple on Tuesday posted the latest in a series of astonishing quarters, with revenue beating Street estimates by nearly $10 billion—but the shares were drifting lower on Wednesday morning. With the stock hovering near its recent all-time high, investors are worried about the future, and taking profits.
Apple shares (ticker: AAPL) were down 0.3%, at $146.32, in recent trading. The S&P 500 was up 0.1%.
To review: For the quarter, Apple posted revenue of $81.4 billion, up 36% from a year earlier and well above the Wall Street consensus forecast of $72.9 billion. Profits were $1.30 a share, easily topping the Street consensus view of $1. The company posted double-digit growth in all categories and all geographies, with particular strength in iPhones, which had revenue of $39.6 billion, up nearly 50% and more than $5 billion above Street estimates, and services, with $17.5 billion in revenue, up 33%. Revenue grew 33% in the Americas, 34% in Europe, and 58% in Greater China.
So here’s what’s worrying investors.
It starts with the supply chain. Apple warned on its postearnings conference call that September-quarter results would see an increase in the hit to sales from component shortages, with a particular impact on iPhone and iPad. That’s a slightly different message than three months ago, when Apple had warned that sales in the June quarter could be reduced by $3 billion to $4 billion due to the impact of supply chain issues on iPad and Macs. T
Apple didn’t mention the iPhone last time—and we’re now less than two months away from the expected launch of the next-generation iPhone. The company said the actual June-quarter impact from supply constraints was below the low end of its forecast range, but it sees a higher impact this quarter.
Meanwhile, Apple warned that overall top-line growth would be slower in the September quarter than in the June quarter. One reason for that is slower growth in services. The company noted that the June quarter benefited from an easy comparison in advertising and Apple Care revenue, which had been hurt a year ago by the pandemic. The comps get tougher from here. And Apple said that it expects that foreign exchange will be three percentage points less favorable this quarter.
Also, there are ongoing concerns about how Mac and iPad demand will hold up as the world emerges from the pandemic, as both product lines saw soaring demand with many people working and learning from home. Mac sales were up 16% in the quarter, and iPad sales were up 12%—down from March-quarter growth of 70% for Macs and 79% for iPads.
And not least, there are continuing worries about how the Biden administration’s aggressive stance on reining in the Big Tech players might affect Apple generally and fees from the App Store in particular.
Bernstein analyst Toni Sacconaghi writes in a research note that the quarter might actually have been a little too good. “The company will be staring down very difficult comps in essentially every business in fiscal year 2022; consensus has been forecasting 3-4% revenue growth for Apple next year, which we believe may be difficult,” he writes. He adds that the stock is now trading at 28 times forward earnings, above historical levels. “We believe that risk reward is balanced to modestly negative over the next six months,” he writes. Sacconaghi keeps his Market Perform rating and $132 target price.
J.P. Morgan analyst Samik Chatterjee writes that the quarter was one of the strongest in years, driven by both iPhone and Services, but that “the uncertainty around the supply chain situation and incremental challenges relative to iPhone supply are limiting optimism following the print.”
Chatterjee adds that Apple’s comment that September-quarter growth would be below the June-quarter level implies that “the company remains concerned” about shipments in what is expected to be a launch quarter for the next generation iPhone. But he remains optimistic about Apple long term, in particular given the strength of iPhone demand, repeating both his Overweight rating and $175 target price.
Morgan Stanley analyst Katy Huberty likewise repeats her Overweight rating on Apple shares, inching up her target price to $168 from $166. Huberty writes that she came away from the quarter “more confident” in the sustainability of revenue growth in fiscal 2022, modeling 5% growth, about a point ahead of the Street.
“Sustainability of revenue growth remains the key investor debate, and we walk away from Q3 earnings with even more confidence that Apple will grow in the December quarter and in fiscal ‘22,” she writes in a research note.
Huberty’s logic is fascinating. She writes that due to stronger-than-expected demand and a tight supply chain, Apple will exit the September quarter with a backlog, in particular for iPhones. “And because Apple enjoys industry leading customer loyalty rates, we don’t view demand as perishable and Apple is therefore set-up for stronger December and fiscal 2022 growth,” she writes. “This improved set-up makes us more constructive on Apple shares near-term and we are buyers on any near-term weakness.”
Write to Eric J. Savitz at eric.savitz@barrons.com
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