Apple (NASDAQ:AAPL) is beginning to see the impact of the ongoing semiconductor shortage, as it posted a rare revenue miss for Q4 FY’21 due to a weaker supply of chips and manufacturing challenges due to Covid-19. Apple also warned that supply could remain constrained through the all-important holiday quarter. However, unlike other companies that have seen big sell-offs following revenue shortfalls and news of supply chain-related issues, Apple stock has largely held up, declining by just about 2% since its earnings report last week.
Apple is clearly in a much better position to navigate the ongoing headwinds compared to other smartphone players. Apple is the most profitable company in the smartphone space by far, with gross margins standing at a solid 42% in Q4 FY’21. This means the company should be in a better position to pay more to secure supply, compared to smaller players, without really impacting its profits. Moreover, Apple appears to have planned for a big iPhone cycle ahead of the chip issues, with Bloomberg previously reporting that the company was looking at a 20% bump in iPhone 13 production over its initial production run for last year’s flagships iPhone 12. This could mean that Apple will see reasonable supply growth despite shortages. Demand should also hold up, as carrier promos for the new devices also appear attractive, as wireless carriers look to sign on customers for their recently built out 5G networks. Stronger momentum in the iPhone business is always a big catalyst for Apple stock, and this could be validated as Apple publishes Q1 FY’22 earnings.
We value Apple at about $159 per share, about 7% ahead of the market price. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.
[10/25/2021] What To Expect From Apple’s Q4 Earnings?
Apple (NASDAQ:AAPL) is expected to publish its Q4 FY’21 results on Thursday, October 28. We expect Apple’s revenues to come in at about $83 billion, marking an increase of about 28.5% year-over-year. EPS is likely to stand at $1.18 per share, an increase of about 57% compared to last year. Our revenue estimates are in line with consensus estimates, while our EPS estimate is slightly below the consensus.
So what are the key trends that are likely to drive Apple’s results? While Apple launched its latest iPhone 13 handsets in September, we don’t expect the device to be a major driver of Apple’s sales, as it was available for sale for just about a week in Q3. That said, we expect revenues to still see a solid year-over-year increase, driven by strong sales of the iPhone 12, higher demand for iPads and Macs as the remote learning and working trend persists, and continued growth in the services segment. However, it’s possible that Apple could be seeing some pressure on device supply, due to the ongoing semiconductor shortage. Apple’s margins are also likely to trend higher on a year-over-year basis, driven by a growing mix of services revenues, higher average prices on iPhones, and other devices. See our interactive dashboard analysis on Apple Pre-Earnings for more details.
Although Apple stock has gained about 15% year-to-date, this was underperforming the broader S&P 500 which was up by about 22% over the same period. The underperformance comes as investors rotated out of pandemic winners such as tech and work from home stocks, to more cyclical and value stocks to play the re-opening. Moreover, investors are likely concerned that Apple’s big iPhone 13 upgrade cycle could see some pressure due to the semiconductor shortage. However, if Apple manages to post a reasonably strong earnings beat in Q4, we could see the stock move higher from current levels. We value Apple stock at about $161 per share, about 8% ahead of the current market price. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.
[7/28/2021] Why Apple Stock Has Further Upside
Apple (NASDAQ:AAPL) posted a record set of Q3 FY’21 results, with revenue surging almost 36% year-over-year to $81.4 billion and earnings per share rising to $1.30, up from around $0.65 last year, as Apple’s 5G iPhones continued to witness strong demand, while its other products, including the Mac and iPad, saw continued traction driven by the work and learn from anywhere trend. Apple also posted one of its thickest gross margins, at a little over 43%, up from just about 38% in the same quarter last year, driven by a more favorable sales mix and higher services revenues. However, Apple stock was actually down by about 2% in after-hours trading, as Apple warned that the global semiconductor shortage could impact sales of its iPhones and iPads over the current quarter.
Although Apple stock trades at $144 per share, close to its all-time highs, with its forward P/E multiple standing at close to 29x, compared to a 5-year average multiple of just about 20x, we still remain bullish. We have increased our Apple price estimate to $157 per share, up from $147 previously, marking a premium of about 9% over the current market price. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.
We think the semiconductor shortage is only likely to have a transitory impact on Apple, and believe that the company should see further upside from its iPhone franchise, with upgraded models around the corner and also from its fast-growing and highly lucrative services business. Apple also appears to be getting more Android customers to migrate to its ecosystem, noting that it saw strong double-digit growth in the number of people who switched in Q3. This is significantly positive, as Apple has done a good job locking in users and better monetizing them with pricier upgrades, new products, and services. While continued revenue growth and solid margin expansion should drive Apple’s profits, shareholder returns could be magnified by Apple’s massive stock buyback program. For perspective, the company has bought back an average of 5% of its stock each year over the last five years.
[7/20/2021] What To Expect From Apple’s Q3?
Apple (NASDAQ:AAPL) is expected to publish its Q3 FY’21 results on July 27. We expect Apple’s Revenues to come in at about $72.5 billion, marking an increase of about 21% year-over-year. EPS is likely to stand at about $1 per share, an increase of about 47% compared to last year. Our revenue estimates are slightly below consensus while our EPS estimate is in line with consensus.
So what are the key trends that are likely to drive Apple’s results? Revenues should see a nice bump year-over-year, driven by strong sales of the iPhone 12, higher demand for iPads and Macs as the remote learning and working trend persists, and continued growth in the services segment. However, Apple typically sees a seasonal decline in sales in Q3 and the company has noted that the drop this quarter could be a bit steeper, due to supply chain-related issues and the slightly delayed launch of the flagship iPhones. Apple’s margins are also likely to trend higher on a year-over-year basis, driven by a growing mix of services revenues, higher average prices on iPhones, and possibly by a favorable forex environment. See our interactive dashboard analysis on Apple’s pre-earnings: What To Expect in FY’Q3? for more details.
Although Apple stock has rallied by almost 50% over the last 12 months, it has underperformed year-to-date, rising by just about 13% versus the S&P 500 which was up by almost 17%. The underperformance comes as investors rotated out of pandemic winners such as tech stocks, to more cyclical and value stocks to play the re-opening. Apple, which trades at almost 30x forward earnings, which is above historical levels, has been impacted to a certain extent. That said, if Apple manages to post a solid earnings beat in Q3, we could see the stock gain further.
[4/29/2021] Why Are Apple’s Margins Surging?
Apple (NASDAQ:AAPL) posted a strong set of Q2 FY’21 results, with revenue surging almost 54% year-over-year to about $90 billion and earnings per share rising to $1.40, up from around $0.64 last year, driven by higher sales of the iPhone, digital services, as well as iPads and Macs. Apple’s gross margins expanded by a remarkable 420 basis points year over year to 42.5%, reaching their highest levels in almost nine years. So what’s driving Apple’s surging margins and can they hold up?
The new iPhone 12 handsets saw their first full quarter of sales over Q2 FY’21, helping iPhone revenue rise 65% compared to last year. The iPhone is Apple’s most profitable hardware product and the new handset is also priced at a premium compared to its predecessors, helping margins. Apple’s services business also had a solid quarter, with sales growing by about 26% compared to last year, with services gross margins rising to 70% from about 65% last year, driven by a more favorable revenue mix, likely skewed toward more commission generating businesses such as apps and third-party subscriptions. For example, Apple says that it has about 660 million paid subscriptions on its platform now, marking an increase of 145 million compared to last year. Separately, Apple said that it also benefited from a favorable foreign exchange environment.
So how will Apple’s margins trend in the long run? The company has guided margins of between 41.5% and 42.5% for Q3, which is reasonably high, considering that FY’Q3 is typically a seasonally weaker quarter compared to FY’Q2. Moreover, Apple expects to see some semiconductor supply constraints for its Macs and iPads over the next quarter, likely putting some pressure on margins.
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[4/16/2021] Apple’s Q2 Earnings Preview
Apple (NASDAQ:AAPL) is expected to publish its Q2 FY’21 results on April 28. We expect Apple’s Revenues to come in at about $76.6 billion, marking an increase of about 31% year-over-year. EPS is likely to stand at about $0.97 per share, an increase of about 51% compared to last year. Our revenue estimates are roughly in line with consensus while our EPS estimate is marginally below consensus. So what are the key trends that are likely to drive Apple’s results? Revenues should see a nice bump year-over-year driven by the higher-priced iPhone 12 handsets – which will see their first full quarter of availability. Higher demand for computing products such as Macs and iPads and stronger growth in the services business is also likely to drive Apple’s top line. Moreover, Apple will see a favorable comparison with Q2 FY’20 when sales were impacted by the first set of Covid-19 related lockdowns. Apple’s margins could also trend higher, driven by a growing mix of services revenues and higher average prices on iPhones, although the supply crunch in the semiconductor market could put some pressure on the company. See our interactive dashboard analysis on Apple’s pre-earnings: What To Expect in Q1? for more details.
Apple stock has rallied by almost 90% over the last 12 months, driven by growing demand for consumer electronics through Covid-19, anticipation surrounding the 5G iPhones, and Apple’s position as a “safe haven” stock. The stock now trades at roughly 30x forward EPS, which is higher compared to historical levels. It’s very likely that Apple’s Q2 results will determine the near-term trajectory for Apple’s stock.
[2/2/2021] What’s Driving Apple’s Expanding Margins?
Apple (NASDAQ:AAPL) had a solid Q1 FY’21, posting record Revenues that topped $110 billion led by the new 5G iPhones. Apple’s Operating Margins also soared by a remarkable 220 basis points year over year to about 30.1%. Can Apple sustain these margins going forward? Let’s take a closer look at what drove Apple’s Products and Services Gross Margins and Operating Expenses to find out.
Apple’s Product Gross Margins, or the profits it makes after accounting for direct costs related to making its iDevices, computers, and accessories, rose by around 90 basis points year over year to 35.1%. Although we actually expected margins to face pressure on account of higher costs relating to 5G components on the new iPhones, Apple significantly beat our margin expectations, driven by a couple of factors. Firstly, Apple has a certain level of fixed costs in its product cost structures and with the product Revenue soaring by about 21%, it benefited from some leverage gains. Secondly, Apple’s product mix has been more favorable than previous quarters, with Apple nudging customers towards “Pro” versions of its devices, which likely have thicker margins. In fact, Apple raised the price of its iPhone 12 versus last year’s iPhone 11, making its iPhone 12 Pro models (priced at $1,000 and up) look like better value compared to last year.
Apple’s Services business also saw Gross Margins soar to around 68.4%, an increase of around 400 basis points versus last year. Services Revenue grew by a strong 24% year-over-year, likely enabling better-fixed cost absorption. Apple also likely saw a large percentage of commission-driven revenues such as App sales and subscriptions, which are much more profitable. Apple’s operating expenses rose by just about 12% year-over-year compared to total Revenues which expanded by 21% and this was also a factor that drove its Operating Margin gains, in addition to the Gross Profit gains.
Our dashboard Breaking Down Apple’s Services Revenue estimates the revenue figures for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.
So can Apple sustain margins at these levels? We think so. Apple’s 2021 Revenues are projected to jump by a solid 21%, per consensus estimates, likely growing faster than Apple’s cost base. Moreover, the full impact of the new iPhone 12 is only likely to be seen in the coming quarters, as production picks up and the devices see full quarters of availability. For perspective, the device went on sale only about 3 to 4 weeks into Q1’FY21, with popular models remaining short-supplied.
[1/25/2021] Will The iPhone 12 Deliver For Apple?
Apple (NASDAQ:AAPL) is slated to publish its Q1 FY’21 earnings on January 27, reporting on a quarter that saw the launch of its much anticipated 5G iPhone 12. We expect Revenues to come in at about $100 billion for the quarter, growing by about 9% versus last year, with EPS likely to grow by about 7% to around $1.35 per share. Our estimates are marginally below the consensus. So what are the key trends that are likely to drive earnings? Firstly, Revenues should see a bump driven by strong demand for the 5G iPhones, which saw multiple models remain back-ordered through the holidays. Apple should also see higher average selling prices for the iconic smartphone, as it raised base pricing on the iPhone 12 versus the iPhone 11, while nudging customers toward the more premium iPhone Pro models (priced at $1,000 and up), which appear to be a better value compared to last year. Apple’s Services business is also likely to have had its strongest quarter yet, driven by the App Store. In fact, Apple provided a data point indicating that between Christmas Eve and New Year’s Eve, a total of $1.8 billion was spent on apps, up 27% versus last year.  App sales growth over the same period last year was about 16%. That said, Apple’s margins could see some pressure, as the new iPhones are likely to be more expensive to produce compared to last year as 5G components are pricier.
Apple stock has rallied by about 65% over the last 12 months, driven largely by anticipation surrounding the 5G iPhones. Apple stock now trades at 33x projected EPS, making it look pricey compared to historical levels. The Q1 FY’21 earnings should give investors a good sense of how the device is faring and could be key to Apple’s stock trajectory in the near-term. See our pre-earnings analysis Apple Earnings Preview: Will Apple Beat Expectations? for more details on Apple’s recent performance and what’s driving its valuation.
[12/9/2020] Apple’s Services Will Overtake The iPhone By 2024
Apple’s (NASDAQ:AAPL) Services business is likely to emerge as its most profitable (and valuable) business within the next four years, likely eclipsing even the iPhone – which is seen as one of the most lucrative consumer products of all time. Here’s how we expect this to play out. We expect Services sales to grow at a rate of about 11% a year (down from a rate of 22% each year over the last 4 years) to $81.5 billion in FY’24, driven by the continued growth of the AppStore and subscription services. On the other hand, we expect iPhone Revenues to grow at an average rate of about 5% each year over the next four years to about $167 billion (iPhone Revenue remained almost flat between 2016 and 2020). Now Apple’s services have much thicker margins compared to hardware products. Over FY’20, Apple’s product Gross Margins stood at 31.5% versus about 66% for Services. If we assume that margins remain flat at current levels, Services Gross Profits would stand at about $54 billion in FY’24, compared to about $53 billion for the iPhone. In fact, Operating Profits could actually be much higher for Services, considering that much of Apple’s Services sales come via commissions, with little marketing or development expenses involved.
Our dashboard Breaking Down Apple’s Services Revenue estimates the revenue figures for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.
However, there are a few caveats. Firstly, Apple’s Service business is quite dependent on fees Google pays Apple for being the default search engine on its iDevices (an estimated 20% of Services Revenue, and a larger percentage of profits). There’s a possibility that the U.S. Justice Department’s antitrust lawsuit against Google could jeopardize these payments, hurting Apple’s services growth. Secondly, Apple is increasingly investing in content production with services such as AppleTV+ and these offerings could also have lower margins.
So what does this mean for Apple stock? Internet services-led companies have typically commanded higher valuation multiples compared to hardware plays on account of their thicker margins, and associated platform-related lock-ins. However, in Apple’s case, this is likely already baked into its valuation. Apple’s trailing P/E multiple has soared and almost doubled over the past year to levels of around 38x currently – which is in line with other Internet players such as Alphabet.
[Updated 11/23/2020] What’s The Impact Of The AppStore Commission Cut?
Last week, Apple (NASDAQ:AAPL) indicated that it would be cutting its commissions on app sales and in-app purchases from 30% to 15% for smaller developers, who earn less than $1 million annually from the AppStore. Apple has been facing significant criticism that its AppStore practices hurt smaller developers and tech giants, including Apple, face increasing scrutiny from regulators regarding their market power. This move should help Apple’s image to a large extent. App analytics company Sensor Tower estimates that about 98% of the developers that pay Apple commissions will benefit. 
However, will reducing commissions by half impact the performance of Apple’s highly lucrative and fast-growing Services business? After all, the AppStore is estimated to account for roughly a third of Apple’s Services Revenue. Not really. Apple earns a bulk of its AppStore revenue from the largest developers, with Sensor Tower indicating that developers who benefit from this program accounted for under 5% of App Store revenues last year. Moreover, the discounted fee will only apply until developers cross the $1 million threshold, after which Apple will bill them at the higher 30% commission rate.
[Updated 8/17/2020] How The Epic Lawsuit Impacts Apple
Last week, Epic Games sued Apple (NASDAQ:AAPL) for antitrust violations, after its popular Fortnite game was removed from the AppStore shortly after Epic let players bypass Apple’s in-app purchase system, avoiding the 30% commission on sales. Although Apple has had spats with developers in the past, the Epic lawsuit is noteworthy for a couple of reasons. Firstly, the Epic lawsuit comes at a time when tech giants, including Apple, have been facing increasing scrutiny from regulators regarding their market power. Secondly, Apple is more dependent on its Services business than ever before, with hardware growth slowing (profits from Services grew 5x as fast as hardware profits over the first three-quarters of FY’20), and Epic’s lawsuit targets Apple’s commissions, which we estimate are Apple’s single most profitable revenue stream.
Apple made roughly about $360 million in commissions from Fortnite over the last two years per Sensor Tower – a relative drop in the bucket for Apple which pulled in $260 billion-plus in revenues last year.  However, if Epic sees a favorable judgment, and if Apple is forced to reduce its commissions or change the terms of its AppStore, this is very likely to set a precedent, causing other developers to demand similar terms.
So what could be the financial impact of Apple reducing commissions across the board? Apple takes a 30% cut on App sales and subscriptions (15% from the second year of subscriptions) and we estimate that total commission revenues stood at almost $20 billion in FY’19 (out of a total of about $46 billion in Services Revenue). If Apple reduced commissions to say 20% from 30%, it would reduced total commissions by about $7 billion to roughly $13 billion. Although the revenue impact would be limited for Apple (under 3% of Apple’s Total Revenue) the impact on profits would be more pronounced given that commissions are likely to be almost entirely profit. We estimate that Apple’s Operating Income would be about 10% lower if commissions were reduced, considering Apple posted about $64 billion in Operating Income in FY’19.
Now commissions of 30% are actually pretty standard across the industry – Alphabet’s (NASDAQ:GOOG) Google, which also faces a similar lawsuit from Epic, as well as Microsoft and Amazon, charge roughly the same fees on app sales on their respective market places. However, Apple has the most to lose from this given the sheer scale of its business. AppStore revenues are roughly twice as large as Google’s Playstore.
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