What do the iPhone production reports mean for Apple (AAPL) stock in the near term and long term? Can Apple ever return to its glory days of high growth? These are some of the questions investors are asking lately, sparked by reports of production cutbacks the company has made on the iPhone 14 smartphones.
These answers will be more clear when the company reports fourth quarter fiscal 2022 earnings results after the closing bell Thursday. Supply chain disruptions and rising inflation have been among the many events that have pressured the company's revenue and profits. Operating headwinds have also been compounded by uncertainty related to global growth slowdown. These factors resulted in Apple’s iPhone revenues to increase just 3% in Q3, while overall revenue rose just 2%.
Meanwhile, Apple stock has held up better than the S&P 500, down just 19% year to date, compared to 23% decline for the S&P 500, suggesting the company is doing a solid job navigating the various headwinds that have impacted its business. Last week the company reportedly cut production of its iPhone 14 Plus model. According to The Information, Apple was said to be reevaluating demand for the product, of which two of its iPhone 14 Plus suppliers cut their production by 70% and 90% respectively.
It remains to be seen whether if there are any significant revenue impacts for this quarter or for the holiday quarter. But this wouldn’t be the first time Apple has adjusted production on any of its products to pair with demand. Last week, Loup Ventures analyst Gene Munster noted that lead times for iPhones are actually running higher than normal for this stage in the product cycle. As such, Munster concluded that Apple’s business "continues to do well" despite the macro pressures. Investors are hoping for more clarity and conviction on the bullish thesis on Thursday.
In the three months that ended September, Wall Street expect the Cupertino, Calif.-based tech giant to earn $1.27 per share on revenue of $88.9 billion. This compares to the year-ago quarter when earnings came to $1.24 per share on revenue of $83.36 billion. For the full year, earnings are expected to rise 8.7% year over year to $6.10 per share, while full-year revenue of $392.75 billion will rise 7.4% year over year.
There’s an overall sense on the market that consumer hardware spending intentions have begun to deteriorate. During the Q3 conference call with analysts, Apple management said that they had not seen any economic pressures on consumer demand for the iPhone. Investors will nonetheless be watching closely to see whether (or how) inflation might have impacted spending on Apple’s pricey hardware. The company’s guidance for the holiday season will also be gauge on the consumer sentiment.
According to analysts at Morgan Stanley, citing channel checks, devices such as iPads and Macs should perform pretty well during the quarter. That’s important given that Mac revenue was down 10% in Q3, while iPad revenue decreased 2%. Apple’s Services business, which includes, among others, subscriptions, Apple Music, iCloud, payment fees, and revenue from the iPhone App Store, now accounts for some 30% of total revenue, and produces higher profit margins. That business is expected to offset weakness in hardware.
In the third quarter, Services revenue rose 12% in Q3 to $19.6 billion, thanks to a surge in subscribers which reached 860 million, up from 825 million in Q2. The results helped the company earn an adjusted EPS of $1.20 for the Q3, beating the $1.16 per share analysts were looking for. Investors on Thursday will look for Apple to improve on each of these metrics. The trajectory of services growth, in particular, and the gross margin guidance will be key drivers for how the stock responds immediately after the report.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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