Apple will report June quarter results on Tuesday, July 27th. We expect fractional upside to June consensus revenue growth estimates of 23% y/y and EPS of $1.01. The numbers will continue to have noise given that comps are the most difficult they’ve been since Sep-18, along with component shortages that likely had a $3-4B negative impact on the Mac and iPad sales. If not for the component shortages, revenue growth would likely be closer to 30% y/y. We expect the results will continue to instill confidence that the company will grow revenue around 30% in FY21, compared to 6% in FY20. The accelerating digital transformation will continue to be a tailwind for Apple’s revenue growth for the next several years.
The growth story will continue
Following March’s impressive 54% revenue growth that resulted in 16% upside to Street estimates, many investors felt the March quarter was as good as it gets for Apple. While growth rates will fluctuate, Apple will remain a growth story for the foreseeable future. Over the next two plus years, the company will benefit from the following tailwinds:
- The accelerating digital transformation means more people are working and learning from home, providing a continued tailwind for the iPad and Mac businesses (about 25% of total revenue). We believe these two segments can grow at 20+% in 2021 and closer to 10% in 2022, compared to flat growth over the last few years. If correct, that would be in line with consensus estimates for this year, and about 7% ahead of the Street for next year.
- 5G enthusiasm will grow in the back half of the year, starting a two to three-year iPhone upgrade cycle.
- Growing anticipation of new business segments that likely won’t launch until 2022 at the earliest. The three biggest untapped markets include AR/MR, wellness, and the opportunity around autonomy with Apple Car. Despite the continued rise in AAPL share price, we believe new product categories are nominally reflected in the current valuation.
How to think about the stock: The case for $200
Putting it together, we believe shares of AAPL will approach $200 (35% upside from current levels) over the next couple of years, based on 35x our 2022 EPS estimate of $5.70.
Key June metrics
- Cash: Apple ended the March quarter with $205B in total cash and $122B in debt, or $83B in net cash. We had expected total cash at the end of March to be $190B, with $112B in debt, or $78B in net cash. We expect net cash to decline in June to $75B. The topic of Apple’s cash position is more complex than its cash balance. Apple has outlined a goal to be net cash neutral over time, suggesting that total cash will eventually equal debt. This is good news for investors—they can expect an additional $83B in cash will be returned through buybacks and dividends or otherwise strategically deployed.
- Revenue: We expect fractional upside to consensus revenue estimates of $73.3B (up 23% y/y). Some analysts’ expectations have drifted above $76B. We see reported revenue in the range of $74B or $76B as confirmation that the growth story is continuing.
- Earnings: We expect EPS of $1.04 (up 61% y/y), ahead of the Street at $1.01.
- Guidance: When the company reported March 2020 quarter results, they stopped providing guidance. That said, they have been increasingly been giving commentary on the earnings call that resembles guidance. We expect uptake commentary given pent-up demand for Mac and iPad in the June quarter should spill over to revenue in the September quarter.
- iPhone: (48% of sales) June iPhone results will see continued benefit from early 5G adoption, an aging base of iPhones 3 years old or older, along with the positive impact from residual stimulus checks in the U.S. Putting those together, we expect 33% y/y growth to $35.2B, ahead of the Street at $34.2B.
- Services: We expect Services (22% of sales) to be up 18% y/y to $15.9B, compared to 27% y/y growth in the March quarter. Analyst expectations are calling for 24% growth. The Services segment does not benefit from an easy year-over-year comparison given demand for Services was steady during 2020. Looking forward, we expect Services growth will dip in the upcoming September quarter given the difficult comps. Long-term, we expect growth to remain around 15% consistently as Apple continues to layer on more Services, including recently announced Apple Fitness+ and its podcast marketplace.
- Wearables: Apple does not report this metric but Loup tracks estimates. We expect wearables (9% of sales) to be up 23% y/y, compared to up 32% last quarter. We believe this segment has lagged, given Apple Watch is viewed by consumers as non-essential compared to iPhone, Mac, and iPad. Adding to the Watch sales headwind has been limited capacity at Apple Stores, where many first-time Watch buyers shop. Apple TV, Home, and Accessories add an additional 2% to overall revenue with mid-single-digit revenue growth.
- Mac: We are modeling for Mac revenue (11% of sales) to be up 13% y/y to $8B. The Street is expecting 10% growth. This segment is a wild card given component shortages. We know that inventory remains tight, and we measured lead times for Mac at the end of June at around 7 days, above its normal June quarter same business day.
- iPad: We expect iPad revenue (10% of sales) to be up 9% y/y to $7.2B. We believe the Street is expecting 8% growth. This is a step down in growth from 79% in March given the impact of component shortages that the Apple called out when they reported the March quarter. Similar to the Mac, we observed iPad lead times at the end of June extending longer than typically at about 14 days, a sign that some of June iPad demand will find its way into the September quarter.
Thoughts on the Epic trial
No word yet from Apple v. Epic bench trial which ended in May. We had expected a decision in June, and believe it could come any week. At stake is the App Store take rate, which is consistent with the broader industry’s two-sided marketplace take rates. Given iOS represents a large share of app store dollar values, Epic argues that the 30% rate is egregious. At Loup, we are split on how the decision will play out, with two of the partners expecting a win for Apple and one expecting it to be in favor of Epic.
The chip shortage
Most tech hardware companies are reporting difficulties in procuring components in the June quarter given global chip shortages. While we had expected these issues to be worked out by the end of the June quarter, we now believe it could be many months before resolution. Recently, Intel CEO Pat Gelsinger reiterated his expectations the global chip shortage will worsen in the near term, and be present going into 2023. The good news for Apple is that component shortages mean products don’t reach supply demand equilibrium, which should give investors confidence that Apple can’t keep up with demand. This is generally favorable for shares of AAPL.
Questions for the call
Here are our top six questions we want to ask Apple on the earnings call:
- In investors’ eyes, you’ve been a victim of your own success and there’s a perception the results can’t get better from here. What’s the case that the more conservative investors are wrong?
- When you think about going into a new market, you’ve said it needs to line up with bringing hardware, software, and services together. Beyond the Apple Watch, is there an opportunity for wellness to expand around this hardware-software-services paradigm?
- Is it true Kevin Lynch has a new job at Apple?
- What’s your latest thinking on AR?
- The pace of opening new Apple Stores has slowed. How do you balance servicing a growing user base without expanding your brick and mortar footprint?
- If Epic wins its lawsuit, what does it mean for Apple?
While the timing of Tesla reaching full autonomy is still an unknown, with Elon Musk less vocal on the topic over the past six months, the company is moving forward with the initiative. Tesla made it official, launching the subscription option for FSD. Expanding the addressable market for FSD through monthly payments is an important step along the long-term path to increasing margins, which will strengthen the company’s operating model. Improving profitability is central for mainstream tech investors to endorse Tesla as a true tech company.
The subscription option shifts the cost of FSD from $10,000 upfront to $200 per month (or $99 for cars that already have advanced Autopilot) and will play an important role in accelerating FSD adoption. The reason is because Tesla buyers are skeptical of the value of what seems like a pricy option, as evidenced by our estimate that nearly 80% of Tesla buyers pass on FSD at the time of purchase. Since owners can subscribe month-to-month, we believe a measurable 20% of annual buyers will give the feature a try. Initially, we expect most will quickly cancel the subscription, and over time as capabilities are added, retention will build. Fast-forwarding 10 years from now, we believe full autonomy will likely be required as a standard feature for all automakers, which would render the FSD subscription a moot topic. The good news for Tesla is that between now and 2031, FSD subscriptions can move the financial needle for the company.
FSD falls short of its name today, will live up to it over time
Today FSD is far from full self-driving and falls short of its name. Over time, we believe it will deliver level 4 or 5 autonomy, thereby living up to the name. Today, there are five key features enabled, including navigate on autopilot, auto lane change, auto park, summon, and traffic light and stop sign control. In essence, FSD today works on highways and in parking lots. Tesla makes it clear when considering FSD that the enabled features require active driver supervision and that it does not make the vehicle autonomous, which begs the question of why the company has named the offering FSD. The answer is eventually the product will be fully autonomous as new features are adding, including autosteer on city streets later this year.
FSD will have a powerful impact on Tesla profits
The math around the potential of FSD is hard to believe. We believe over the next decade, booked operating profit from FSD upfront and subscriptions will increase from $600m in 2021 to $102B in 2032. This implies today that 20% of annual buyers purchase FSD upfront and 3% of the remaining eligible vehicles subscribe. As features are added over the next five years, we believe those numbers will increase to 31% and 15% respectively, climbing to 45% and 34% in ten years. That means in 2031, about 80% of Teslas on the road will have FSD. As mentioned, looking past a decade, we expect full autonomy will be a required feature to sell cars globally. In terms of operating profit, we’re modeling for operating margin to increase from 42% this year to 64% in a decade.
What does this mean for TSLA valuation?
Ultimately it’s up to Tesla investors to decide what multiple to assign to the company’s FSD profits. That said, there is room for earnings expansion. Assuming our estimates are too optimistic, and the company does a third of the FSD profits in 10 years that we’re predicting, applying a 25x multiple on those profits suggests FSD alone is worth $850B in a decade, compared to the company’s current market cap of $620B. Keep in mind that a portion of Tesla’s current valuation is already pricing in some FSD success.
Gene vectors into the toy department and reviews Civilized Cycles generation 1.0, and concludes dynamic suspension is worth the wait.