Apple Inc. executives said last quarter that they had yet to see economic pressures impact consumer demand for the iPhone, but investors are going to need more convincing this time around.
The consumer-electronics giant continues to be dogged by reports that executives are hemming production of new iPhones ahead of Thursday’s fiscal fourth-quarter earnings report, and that has fueled concerns about slackening demand for the expensive hardware in an inflationary climate. While Apple
declined to raise prices on its latest iPhone models, their prices remain steep across the board, ranging from $799 for the cheapest iPhone 14 to $1,599 for the costliest iPhone 14 Pro Max.
There’s debate about what the reported production cuts actually mean. One recent report, from The Information, said that Apple told “at least one manufacturer in China to immediately halt production of iPhone 14 Plus components” as the company reassesses the device’s demand. Such a trend could signal spending pressure among lower-income customers who might typically opt for one of the base-level iPhones—or it could merely reflect the lack of meaningful feature improvements in those specific devices relative to the Pro models.
Additionally, a Bloomberg News report from late September indicated that Apple was declining to go ahead with planned production increases for the iPhone 14 family as it instead targeted production levels similar to last year. For Apple to produce only as many phones as it did last cycle would hardly be earth-shattering, but if the company did indeed recently adjust estimates, it could be seeing consumer-spending signals that have ramifications for the company’s broader portfolio.
“Historically, Apple’s FY Q4 earnings results are not particularly important, butforward guidance/commentary is,” Bernstein analyst Toni Sacconaghi wrote ahead of Apple’s Oct. 27 report. That seems especially the case in the current economic climate.
While Sacconaghi doesn’t think the company will provide traditional quantitative guidance — management has offered something more along the lines of “guidelines” since the pandemic began — he predicts that Apple’s “qualitative commentary around the demand environment may ultimately shape investor sentiment more.”
Panic over possible production cuts appears at odds with other seemingly healthier demand indicators, according to Evercore ISI analyst Amit Daryanani. He noted that while lead times for the Pro-level models have come down internationally, they remained stable in the U.S. at about 25 days as of his Oct. 18 note to clients. The phones went on sale starting in September.
“Demand has remained strong and is in stark contrast to recent concerns around a slowdown,” he wrote. Further, Apple could be realizing higher average selling prices given the indications that Pro devices are selling better than the cheaper base-level ones.
Here’s what to watch for in the company’s fiscal fourth-quarter report.
What to expect
Earnings: Analysts tracked by FactSet expect Apple to post $1.27 a share in earnings for the September quarter, up from $1.24 a share a year before. On Estimize — which crowdsources projections from hedge funds, academics, and others — the average estimate calls for $1.30 in earnings per share.
Revenue: The FactSet consensus calls for $88.7 billion in revenue, up from $83.4 billion a year earlier. Those contributing to Estimize expect $88.6 billion on average.
Analysts tracked by FactSet are looking for Apple to post $43.4 billion in iPhone revenue, up from $38.9 billion a year prior. They’re also looking for $7.7 billion in iPad revenue and $9 billion in Mac revenue, both of which would mark declines from year-earlier figures. The company posted $8.3 billion in iPad revenue and $9.2 billion in Mac revenue during the same period in 2021.
Analysts project $8.9 billion in wearables, home, and accessories revenue, up from $8.8 billion a year before. And they’re calling for services revenue to top $20 billion for the first time at $20.1 billion. Apple posted $18.3 billion in revenue for that category a year ago.
Stock movement: Apple shares have gained after only three of the company’s past 10 earnings reports. The stock has fallen 19% so far this year, while the Dow Jones Industrial Average
which counts Apple as a component, has lost 17% and the S&P 500 index
has declined 23%.
Of the 41 analysts tracked by FactSet who cover Apple’s stock, 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 for
One key issue across earnings reports this cycle is the negative impact of the stronger U.S. dollar. While Apple’s management team predicted about three months back that foreign exchange could have a 600-basis-point negative impact on sales growth in the September, D.A. 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
the Canadian dollar
and the Japanese yen
He’ll be watching for signs of a “bigger-than-expected headwind from the strong U.S. dollar” when Apple posts results.
Morgan Stanley’s Erik Woodring is interested in the effects of an extra week in Apple’s December quarter. He noted that in fiscal 2017, the last time Apple had a 14-week holiday quarter, “both product and services grew at an above-seasonal 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 dynamic.
In general, he sees controversy on Wall Street over how Apple’s December quarter will play out, which is why the company’s “directional” outlook for the period will be “critical” in his view.
Woodring will also be watching for expectations on the services trajectory in the December period, “although most investors are aligned that services revenue growth should accelerate” in this quarter.
Barclays analyst Tim Long thinks Apple’s iPad and Mac categories can beat expectations for the latest quarter, driven in part by improved supply. The computer business also benefits from shipments of new M2 Macs.
He’s less upbeat about results for the service and wearables categories, noting that the “App Store continues to weaken,” partly due to macroeconomic issues but also as a result of regulatory pressure in China. For the wearables business, he says that such products “are viewed as more discretionary and have more macro sensitivity.”