Apple Q3 2022 earnings preview: Macroeconomic concerns dominate

Tim Cook, CEO of Apple Inc. , during the Apple Worldwide Developers Conference at the Apple Park campus in Cupertino, California, United States, on Monday, June 6, 2022.

David Paul Morris | Bloomberg | Getty Images

Apple announces earnings on Thursday for the quarter ending in June.

Apple’s fiscal third quarter is typically the smallest in terms of sales. The quarter falls in the back half of the iPhone’s annual update cycle as investors start looking forward to the release of a new model, boosting sales starting in late September or October.

This year, analysts and investors will be watching Apple’s earnings closely in the face of several new macroeconomic trends, including declining consumer confidence, rising interest rates, and decades-old high inflation.

So far, Apple’s sales have remained strong, in part because its customers are a fairly affordable group. But any signs that people are delaying their Mac and iPhone purchases due to inflation or recession fears could have repercussions for the economy as a whole.

Apple also has significant exposure to China, both as a market for selling its products and as a country where most of its products are assembled. Several Apple factories in China were shifted or suspended production at times during the June quarter due to the Covid shutdown.

Analysts polled by FactSet expect Apple to reach $82.8 billion in sales, which would be less than 2% of growth in the same quarter last year and the slowest quarter of growth since the start of the pandemic.

Analysts also expect earnings per share of $1.16, which would be a 10.7% year-over-year decline. The company said in April that gross margin would also drop from 43.7% last quarter — Apple’s highest level in history — to between 42% and 43%.

Supply issues and shutdowns in China

In April, Apple’s story wasn’t about demand: it was about supply. “Right now, our main focus is, frankly, on the supply side,” Apple CEO Tim Cook told analysts.

Apple has warned that between $4 billion and $8 billion in revenue will be hit by supply issues, including chip shortages and production hurdles. Some analysts say Apple will point out that it has managed its supply chain well and foregone revenue will end at the end of Apple’s handbook.

“We believe the company has managed its supply chain better than it planned a quarter ago, while continuing to gain a share in an otherwise 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 been a hit in the past few quarters as Apple has prioritized iPhone parts and other products.

“We also expect iPad sales to improve in part due to improved supply, and we believe the adverse hold on Apple supply from $4 billion to $8 billion for the June quarter was likely at the lower end of that range,” Michael Walkley, analyst at Canaccord Genuity, wrote in his book. . Note this month.

Apple has faced shutdowns in urban areas of China, including Shanghai. Covid restrictions could have hit Apple’s iPhone sales in China earlier this quarter, but could have charged sales in June leaving people to shutdown willing to spend.

Analysts polled by FactSet expect Apple’s sales in Greater China to be around $13.79 billion, which would be down from $14.56 billion in sales from last year.

September quarter order

Investors will also listen closely to see if Apple is signaling consumer weakness in any region around the world.

“We believe the expectations/demand hold will be the main focus as we try to gauge the impact on Apple’s earnings in the event of a slowdown in the consumer/macro environment,” Wells Fargo analyst Aaron Rackers said in a note.

Sales of smartphones and computers slowed, but Apple was less affected because the high-end market, where it sells, was more resilient. TSMC, a major supplier of processors to Apple, has warned that demand for personal computers, smartphones and consumer electronics is trending weaker.

If Apple indicates that demand is slowing, that would be another indication of a possible recession.

Goldman Sachs’ Rod Hall believes that “high demand may begin to weaken in Europe, driven by rising inflation and lower consumer confidence.”

Apple has not announced a hiring slowdown or other cost controls, unlike Alphabet, Tesla, Microsoft and Meta. But Apple is quietly slowing the pace of hiring, according to Bloomberg News, and some analysts believe the company’s management can talk about its strategy to control expenses.

Apple has not provided guidance since the start of the pandemic, citing uncertainty, and some expect the trend to continue.

“While we don’t expect Apple to direct the F4Q22, the company will likely provide qualitative commentary as it has done for several quarters,” Rakers wrote.

Can Apple remain a safe haven?

Overall, analysts remain confident in Apple as an efficient company with a strong cash balance, loyal customers, and competitive products.

But can Apple remain a safe haven with other tech stocks falling and markets plunging? Apple’s prices are down about 15% so far in 2022, but that’s better than the Nasdaq, which is down 18%.

“Apple remains the best consumer electronics company able to invest by cycles, and with 60%+ revenue, more commodity in nature, strong brand loyalty, and continuous innovation in products/services, we believe it is better insulated compared to its peers,” wrote Huberty. Morgan Stanley during the downturn.

One of the keys to Apple investors in the downturn is the growth of the services business, which makes overall hardware sales growth less significant. Apple’s services, which include monthly subscriptions, payment fees, warranties, Google search license fees, and revenue from the iPhone App Store, offer higher profit margins than the core hardware business.

Apple’s services business is expected to rise 12% year-over-year, according to analysts polled by FactSet.

That’s slower growth than the 17% annual growth rate it posted in the second quarter, and a significant drop from the 27% growth Apple achieved 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 weak. Apple’s board authorized additional stock and dividend buybacks of $90 billion in April.

“We believe that the resilience of earnings estimates in light of macro deterioration, including both inflation and poor exchange rates, will continue to lead investors to favor Apple with strong cash generation and a balance sheet that allows it to offset any dividend dilution at the expense of the macro through buybacks.” Chatterjee wrote in a note.

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