Evercore: Apple facing September headwinds

From a note by analyst Amit Daryanani that landed on my desktop Sunday:

ALL YOU NEED TO KNOW: Apple should report relatively strong upside to the June-qtr, but COVID and manufacturing dynamics (floods in China regions where Foxconn sites are) could limit how much upside AAPL wants to flow into the Sept-qtr.

We are currently ~5% below consensus on our Sept-qtr outlook as we see potential headwinds from both the ongoing supply shortage as well as lapping some very strong comps in most product lines. Apple indicated supply would have a $3B- $4B impact in the June-qtr and we expect this headwind to accelerate in the Sept-qtr, as all signs seem to indicate the situation has gotten worse over the past three months.

iPhone revenue should once again come in strong y/y in the June-qtr given Apple only reached supply/demand balance for the product in March. Services growth will likely decelerate in June-qtr and potentially again in Sept-qtr given that we are lapping some tough App Store comps.

Over the long-term, we remain confident that the Services business can continue to grow at a high-teens rate. Mac and iPad will see the greatest impact from the supply shortage and they are also facing some very difficult COVID comps.

Net/net: Comps are getting tougher and there is some near-term uncertainty around iPhone guide for Sept-qtr. Despite near-term uncertainty, we remain confident Apple can continue to sustainably grow earnings in the high-teens. In addition, the headwinds we highlight appear to be relatively priced in given Apple has underperformed the S&P 500 by around 800bps YTD.

Maintains overweight rating and $175 target.

My take: What’s a little near-term uncertainty among friends.

9 Comments

  1. Gregg Thurman said:
    A pretty balanced assessment of what Apple faces going into the September quarter. What isn’t addressed is how the Chinese will respond to flooding and, more importantly, how will Foxconn respond.

    Apple and Foxconn have both demonstrated very strong disaster response skills. I’m not sure I would discount September results just yet. It’s still two distant.

    4
    July 25, 2021
  2. David Emery said:
    Predicting supply-chain headwinds… That’s a practice with a particularly poor track record. And given the seasonal demand curve, it seems to me this would be the quarter that Apple would catch up, while transitioning the supply chain for the new Fall products.

    So I’m rating this particular note as ‘questionable’. And the position that these arguments are already baked-in to AAPL’s price seems to be wistful thinking, given what we hear from others.

    4
    July 25, 2021
  3. Jerry Doyle said:
    This is what the “Global Times” is reporting:

    “…. Foxconn said that the rain didn’t have a ‘direct impact’ on its facility, which reportedly makes half of the iPhones worldwide. …. ‘It may have to halt production for a couple days, but the work can quickly be made up. It is unlikely that the rain will affect or delay the launch of the new iPhone,’ Xiang Ligang, director general of the Beijing-based Information Consumption Alliance, told the Global Times on Wednesday.”

    “…. Cao Heping, a professor of economics at Peking University in Beijing, told the Global Times on Wednesday that the impact on the international supply chain will also be limited, given the province’s increasing capability in dealing with flooding since the 1980s.”

    6
    July 25, 2021
  4. Fred Stein said:
    While I like Amit, supply chain rumors/projections don’t cut it. Maybe a few days impact, but no impact on full year financials.

    5
    July 25, 2021
  5. Paul Brindze said:
    I don’t buy that there will be any significant flood impact on Apple. That said, I believe this story could be used to dampen the good earnings news expected and hold PPS down immediately post earnings.

    0
    July 25, 2021
  6. Jerry Doyle said:
    I just finished listening to an Above Avalon podcast where Neil Cybart talked about Apple’s supply chain containing much more “optionality” than critics imagine, or perhaps even known to us.

    Neil says Apple’s supply chain and manufacturing apparatus remains underestimated by WS. Consensus isn’t giving Apple enough credit for what Tim Cook has structured over the past two decades. Neil denotes that there is a battle going on among the world’s powers for Apple’s business. Apple is one of the very few companies says Neil, to give a country “legitimacy.”

    China and Apple’s working relationship exists through mutual need to work together and through each knowing the other benefits from that relationship.

    China will prioritize any slippage during this period to address Apple’s concerns.

    5
    July 25, 2021
  7. Gregg Thurman said:
    No sooner than I ask, “Where in the World is Ming Cho Kuo” (What it means that Apple et al. all report earnings next week) than he appears with a prediction that he says won’t appear for another year.

    Hell, just about anything could happen in a year.

    0
    July 25, 2021
  8. Floods impacted employees & suppliers but so far Foxconn iPhone assembly facilities were not flooded. As this is a ‘fluid’ situation everything could change next week. There are Apple suppliers in regions in Europe and Taiwan likely impacted to a greater degree. DW, German public news, has some grim reports on that front. Dutch & Belgian losses were major too. Apple products are globally sourced.

    1
    July 25, 2021
  9. Mark Visnic said:
    The very last thing I worry about with AAPL exposure is the supply chain; not with the supply chain GOAT at the helm, none other than Tim Cook.

    1
    July 25, 2021

Leave a Reply