We Shouldn’t Be Surprised by Apple’s Results

We Shouldn’t Be Surprised by Apple’s Results

I’ve seen a lot of Apple quarters. So many that the countless impressive ones blur together. I’m trying to guard against recency bias but I still believe this one was memorable. Not just because the December quarter and March outlook were impressive on all metrics — Apple’s done that before. This time was different given it was in the face of chip shortages, COVID, ships parked outside of ports, spikes in logistic costs, store closings, and hard comps. When I searched for an explanation of how they did it, I realized I shouldn’t be surprised by the performance. When you build the best consumer tech in the world, things turn out that way.

These results come at a time when tech investors are on edge. A company blinks, and its shares get punished. Given that backdrop, shares of Apple likely won’t get proper credit in the near term for these results. The good news is over the long-term I believe that shares will be fairly rewarded. They’ll keep making the best consumer tech in the world, and things will keep turning out this way.

Over the next two years, I believe shares of AAPL can reach $250. This is based upon a belief that a multi-year iPhone 5G upgrade cycle will lead the company to $7.00 in FY23 earnings. The Street is currently at $6.20. On top of that, I expect investor anticipation of the new addressable markets over the next five years — including the metaverse and autonomy — to increase AAPL’s multiple to 35x.

Results:

  • December revenue exceeded the Street by 5%, growing at 11% y/y. If not for the supply chain headwind, we estimate revenue would have grown at 18% y/y.
  • Despite spikes in logistic costs, gross margin easily exceeded expectations at 43.8% vs the Street at 41.8%. We believe this was driven in part from upside in the higher-margin Services segment along with lowering per unit product production costs.
  • Services grew 24% y/y, compared to 20% in the September quarter.
  • Strength came across all products and geographies with the exception of iPad which is being acutely impacted by supply constraints. Currently, iPad lead times in six countries are running 40 days plus, compared to typical March quarter iPad lead times of same business day.
  • The active device base grew 9% y/y to 1.8B, compared to 10% growth last year. This growth is impressive given it’s in the face of a growing law of large numbers headwind.

Guidance:

  • CFO Luca Maestri implied March revenue will come in between $91.0-$94.0B, ahead of the $90.7B Street expectation. Guidance would have been even higher if not for a 3% FX and what we estimate to be a 4% supply chain headwind.
  • What’s particularly impressive is that guidance is going up against staggering y/y comps including an iPhone comp of 66% and a Services comp of 27%. Those two segments account for about 70% of Apple’s revenue.
  • They also guided up gross margin, expecting between 42.5% and 43.5%, compared to the Street at 42.1%. This is being done while Apple maintains pricing in an inflationary environment.

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