Apple: Stripping Out the Noise Reveals Sustainable Growth Trend

Apple: Stripping Out the Noise Reveals Sustainable Growth Trend

Apple’s September quarter results and commentary around the December quarter played out as expected, with favorable demand being muted by tight supply. Under the headline that the supply headwind will worsen in December, pushing demand into March, is the reality that Apple’s business and outlook are stronger than ever. Revenue will grow this quarter despite what we believe is a $10B difficult comp around the timing of iPhone 13, along with an $8B supply headwind. Adjusting for these factors reveals a business that is growing in the mid-teens. From a high level, we don’t expect an air-pocket in demand next year and see the company on track to grow in FY22 comfortably ahead of current Street estimates of 4%.

Tight supply impact on September

For the September quarter, the company reported a $6B supply headwind, ahead of our $4B expectation. The good news is one of the key issues around supply has improved related to Covid-manufacturing shutdowns in southeast Asia. Adjusting for the incremental $2B headwind implies the September quarter would have slightly exceeded the Street’s $85B mark compared to the reported 2% miss. This perceived miss is what likely drove shares of AAPL down in after-hours trading.

Supply impact will worsen in December

Apple does not give formal guidance, opting instead to give commentary on trends in the business.  For the December quarter, the company said the supply impact will worsen because of the spike in holiday demand. This will result in a greater supply headwind compared to the $6B in the September quarter. Previously, we had expected a $6.0-$8.0B headwind, and now believe it will be around $8B.

“Solid growth” expectations suggest mid-teens growth

The biggest takeaway related to the December outlook was commentary on expected solid growth in the quarter. The phrase is subject to interpretation, which makes modeling more challenging. Our view is 5% y/y growth is an appropriate read, which puts revenue this quarter at $116B, slightly below the Street at $118B. Adjusting the increased supply challenges, which adds back an incremental $3B for the average Street model, equates to guidance of $119B, fractionally above the Street. In some ways, the previous exercise is splitting hairs and misses the bigger point. December will grow year-over-year despite a $10B plus comp headwind around the timing of iPhone 13 and what will likely be an $8B supply headwind. If you normalize those two factors, the underlying growth is in the mid-teens.

The big picture: macro tailwinds should continue

We believe the accelerating digital transformation will continue well into 2022 and beyond. This means more people working, learning, and playing at home will provide a sustained tailwind for the iPad and Mac businesses (about 25% of total revenue). We believe these two segments can grow at 10% plus in 2022, compared to flat growth over the last few years. Services revenue is also benefitting from pandemic-related consumer habits. We expect these tailwinds to persist for the better part of 2022. Additionally, 5G enthusiasm will grow in 2022, the second year of what we believe will be a three-year iPhone upgrade cycle.

It’s clear that growth will slow next year, as it will for almost all big tech. For Apple, we believe FY22 revenue growth will likely end up in the mid-to-high single-digits, compared to the Street which is looking for 4% growth. If Apple continues to modestly exceed expectations over the next year, we believe shares of AAPL will continue to appreciate. If the next year plays out in line with our expectations, we believe shares of Apple can reach $200 in the next one to two years, based on a 28x multiple to EPS of $7 in 2023 (the Street is around $6). We believe that 7-9% top-line growth is sustainable for a few years until Apple launches into new product categories like AR, wearables, wellness, and automation (maybe vehicles). At that point, growth will step up again putting investors’ growth sustainability questions to rest, at least for a few more years.