By Emilie Bary
Earnings preview: Amid reports of production cuts on the new iPhone 14 family of smartphones, Wall Street will be watching the impact of inflation on spending on expensive Apple devices and what executives think of the season. holidays
Apple Inc. executives said last quarter that they had yet to see economic pressures affect consumer demand for the iPhone, but investors are going to need more conviction this time around.
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 it has fueled concerns about the slowing demand for expensive equipment in an inflationary climate. While Apple (AAPL) has refused to raise the prices of its latest iPhone models, their prices remain high across the board, ranging from $799 for the cheapest iPhone 14 to $1,599 for the Most expensive iPhone 14 Pro Max.
There is some debate over what the reported production cuts really mean. A recent report, from The Information, said Apple has told “at least one manufacturer in China to immediately halt production of iPhone 14 Plus components” as the company reassesses demand for the device. Such a trend could signal spending pressure among lower-income customers who might typically opt for one of the base iPhones – or it could simply reflect the lack of significant feature enhancements for these specific devices over the Pro models. .
Read: Rumored Apple 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 move forward with planned production increases for the iPhone 14 family, as it instead targeted production levels similar to those of the iPhone 14 family. last year. For Apple to produce just as many phones as it did in the last cycle would hardly be earth-shattering, but if the company has indeed recently adjusted its estimates, it could see consumer spending signals that have ramifications for Apple’s broader portfolio. the society.
“Historically, Apple’s fiscal fourth quarter results aren’t particularly important, but forward-looking advice/comments are,” Bernstein analyst Toni Sacconaghi wrote ahead of Apple’s 27 report. october. This seems especially the case in the current economic climate.
While Sacconaghi doesn’t think the company will provide traditional quantitative advice — management has offered something more along the lines of “guidelines” since the pandemic began — he predicts that Apple’s “qualitative feedback on demand environment could ultimately further shape investor sentiment.” .”
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Panic over potential production cuts appears at odds with other seemingly healthier demand indicators, according to Evercore ISI analyst Amit Daryanani. He noted that while delivery times for Pro-level models have decreased internationally, they’ve held steady in the US at around 25 days from his Oct. 18 note to customers. The phones went on sale from September.
“Demand has remained strong and contrasts sharply with recent concerns about a slowdown,” he wrote. Additionally, Apple could achieve higher average selling prices given indications that Pro devices are selling better than cheaper entry-level devices.
Here’s what to watch for in the company’s fourth quarter fiscal report.
What to expect
Earnings: Analysts tracked by FactSet expect Apple to post earnings of $1.27 per share for the September quarter, up from $1.24 per share a year ago. On Estimize — which uses projections from hedge funds, academics and others — the average estimate calls for $1.30 in earnings per share.
Revenue: The FactSet consensus projects revenue of $88.7 billion, 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 for $7.7 billion in iPad revenue and $9 billion in Mac revenue, both of which would mark a drop from the previous year’s numbers. The company posted $8.3 billion in iPad revenue and $9.2 billion in Mac revenue during the same period in 2021.
Analysts forecast $8.9 billion in wearables, home and accessories revenue, up from $8.8 billion a year earlier. And they’re asking for service revenue to top $20 billion for the first time, at $20.1 billion. Apple reported revenue of $18.3 billion for this category a year ago.
Stock movement: Apple shares have gained after just three of the company’s last 10 earnings reports. The stock has fallen 19% so far this year, while the Dow Jones Industrial Average, which counts Apple as a component, is down 17% and the S&P 500 Index is down 23%.
Of the 41 analysts tracked by FactSet who cover Apple shares, 32 have buy ratings, seven have hold ratings and two have sell ratings, with an average price target of $143.39.
What else to watch out for
A key issue in earnings reports this cycle is the negative impact of the appreciation of the US dollar. While Apple’s management team predicted about three months ago that the currency could negatively impact sales growth by 600 basis points in September, DA Davidson analyst Tom Forte notes that “the U.S. dollar strengthened against a basket of currencies that we believe are important to Apple” during the quarter. These include the British pound, Canadian dollar, euro and of the Japanese yen.
He will watch for signs of a “bigger than expected headwind from the strong US dollar” when Apple releases the results.
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Morgan Stanley’s Erik Woodring looks at the effects of an extra week in Apple’s December quarter. He noted that in fiscal year 2017, the last time Apple had a 14-week holiday quarter, “products and services grew at an above-season rate given the extra holiday week included in the month of December”.
Consensus estimates may not fully reflect the potential for Apple to benefit from this momentum.
In general, he sees controversy on Wall Street over how Apple’s December quarter will play out, so the company’s “directional” outlook for the period will be “critical” in his view.
Woodring will also be monitoring expectations for the trajectory of services over the December period, “although most investors agree that services revenue growth is expected to accelerate” in this quarter.
See also: Apple introduces new iPad and iPad Pro with speed improvements
Barclays analyst Tim Long thinks Apple’s iPad and Mac categories may beat expectations for the final quarter, thanks in part to improved supply. The IT business also benefited from the deliveries of new Mac M2s.
He is less optimistic about the results of the services and wearables categories, noting that “the App Store continues to weaken”, partly due to macroeconomic problems but also due to regulatory pressure in China. For the apparel sector, he says these products “are considered more discretionary and have greater macro sensitivity.”
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