Written by Emily Barry
Earnings preview: Amid reports of production cuts on the iPhone 14 family of new smartphones, Wall Street will be watching to see how inflation has affected spending on expensive Apple devices and what executives think about the holiday season
Apple executives said last quarter that they have yet to see the impact of economic pressures on consumer demand for the iPhone, but investors will need more convincing this time around.
The consumer electronics giant continues to be under attack by reports that executives are limiting production of new iPhones ahead of Thursday’s fiscal fourth-quarter earnings report, and that has raised concerns about slowing demand for expensive devices in an inflationary climate. While Apple (AAPL) refused to raise prices on its latest iPhone models, its prices remained steep across the board, ranging from $799 for the cheapest iPhone 14 to $1599 for the most expensive iPhone 14 Pro Max.
There is controversy over what the reported production cuts actually mean. One recent report, from The Information, said that Apple has asked “at least one manufacturer in China to immediately halt production of iPhone 14 Plus components” as the company reassesses demand for the device. This trend could indicate spending pressure among lower-income customers who would typically choose one of the entry-level iPhones — or it could just reflect the lack of meaningful improvements in these specific hardware for the Pro models.
Read: Apple’s rumored production cut ‘overshadows core story’ for 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 because it instead targeted similar production levels for last year. For Apple to produce just as many phones as it did in the past cycle, that wouldn’t be as horrific, but if the company really does adjust estimates recently, it could see signs of consumer spending having repercussions on the company’s broader portfolio.
“Historically, Apple’s fiscal fourth-quarter earnings results aren’t particularly important, but forward guidance/commentary is,” Bernstein analyst Tony Sakunagi wrote before Apple’s October 27 report. This seems particularly the case in the current economic climate.
While Sakunagi doesn’t think the company will offer traditional quantitative guidance — management has provided something more in line with “guidance” since the pandemic began — he predicts that “Apple’s qualitative comment about the demand environment may ultimately shape investor sentiment more.”
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The panic over potential production cuts appears to be contradicting other indicators of demand that appear to be healthier, according to Evercore ISI analyst Amit Daryanani. He noted that while lead times for Pro-level forms have fallen internationally, they have remained stable in the US at about 25 days as of his October 18 note to clients. The phones went on sale in September.
“Demand has remained strong and stands in stark contrast to recent concerns about a slowdown,” he wrote. On top of that, Apple could achieve higher average selling prices due to signs that the Pro devices are selling better than the cheaper ones at the base level.
Here’s what to watch for the company’s fourth-quarter financial report.
what are you expecting
Earnings: Analysts tracked by FactSet expect Apple to report $1.27 a share of earnings for the September quarter, up from $1.24 a share a year earlier. At estimation—which crowds out forecast sources from hedge funds, academics, and others—the average estimate requires $1.30 in earnings per share.
Revenue: The FactSet consensus calls for revenue of $88.7 billion, up from $83.4 billion in the previous year. Those who contribute to Estimize expect an average of $88.6 billion.
Analysts tracked by FactSet expect Apple to report $43.4 billion in iPhone revenue, up from $38.9 billion the year before. They’re also looking at $7.7 billion in iPad revenue and $9 billion in Mac revenue, both down from the previous year’s figures. The company reported $8.3 billion in iPad revenue and $9.2 billion in Mac revenue during the same period in 2021.
Analysts expect revenue in wearables, home, and accessories to reach $8.9 billion, compared to $8.8 billion a year earlier. They are calling for service revenue to hit $20 billion for the first time at $20.1 billion. Apple reported $18.3 billion in revenue for this category a year ago.
Stock movement: Apple shares have gained after just three of the company’s past 10 earnings reports. The stock is down 19% so far this year, while the Dow Jones Industrial Average, of which Apple is a component, is down 17% and the S&P 500 is down 23%.
Of the 41 analysts tracked by FactSet covering Apple stocks, 32 have buy valuations, seven have flat valuations, and two have sell valuations, with an average price target of $143.39.
What else to watch
One of the main issues across earnings reports in this cycle is the negative impact of a stronger US dollar. While Apple’s management team predicted about three months ago that foreign exchange could have a negative 600 basis point impact on sales growth in September, DA Davidson analyst Tom Forte noted that “the US dollar strengthened against a basket of currencies that we believe is important to the company.” Apple” during the quarter. They include the British pound, the Canadian dollar, the euro, and the Japanese yen.
Will watch for signs of “larger-than-expected headwinds from a strong US dollar” when Apple releases results.
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Morgan Stanley’s Eric Woodring is concerned with the effects of an additional week in the December quarter for Apple. He noted that in fiscal 2017, the last time Apple took a 14-week quarterly holiday, “both products and services grew at a rate above seasonality due to the additional holiday week included in December.”
The consensus estimates may not fully reflect the potential for Apple to benefit from this dynamic.
Overall, he sees a debate on Wall Street about how Apple’s December quarter will turn out, which is why the company’s “directional” forecast for this period will be “crucial” in his view.
Woodring will also monitor the outlook for services trajectory in the December period, “although most investors agree that services revenue growth should accelerate” this quarter.
See also: Apple introduces new iPad and iPad Pro with speed improvements
Barclays analyst Tim Long believes Apple’s iPad and Mac categories could beat expectations for the fourth quarter, driven in part by improved supply. The computer business is also benefiting from shipments of new M2 Macs.
He is less optimistic about the results for the services and wearables categories, noting that “the App Store continues to weaken,” due in part to macroeconomic issues but also as a result of regulatory pressure in China. For the wearables business, he says, such products are “viewed as more discretionary and have greater sensitivity on a macro level.”
– Emily Barry
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