Apple’s solid fiscal Q2 2022 quarter: What the analysts are saying

Excerpts from the notes I’ve seen. More as they come in.

Toni Sacconaghi, Bernstein: Expected headwinds emerge, dampening outlook… but fundamentals remain solid. Apple’s FY Q2 results were good, with the company beating consensus revenues by $3B or 3% and EPS by 7% ($1.52 vs. $1.43). We believe that supply constraints impacted Apple’s revenues by $1-$2B in Q2, notably less than the $6B-$7B impact in FY Q1; in essence, Apple appears to have “recaptured” some lost sales from Q1 in Q2 and replenished some channel inventory, which collectively contributed to above seasonal growth. Apple did not comment on its revenue outlook for Q3, but appears to expect flattish YoY growth, well below consensus (+6%). Apple cited several headwinds (component issues; re-ramping of Covid-impacted assembly facilities; currency; Russia exit) for its outlook. We lower Q3 EPS from $1.24 to $1.17, but our FY 22 EPS is largely unchanged. Market-Perform. $170. 

Chris Caso, Raymond James: Battling Through the Headwinds. Apple posted a strong March quarter, but commentary implied incremental weakness in June driven by currency, the loss of Russia revenue, and the most significant impact coming from production issues driven by China lockdowns. We assume revenue of ~$81B take these factors into consideration. The production issues ought to be transitory – and they occur at the best possible time of the year during the weakest seasonal period ahead of fall launches. We think that sets September up well assuming China normalizes. We, however, consider FX and Russia to be more permanent, and now fear that Apple may need to raise prices in local currency when new products launch in the fall, if exchange rates don’t change by then. When that’s happened in the past, rising local prices have a negative effect on unit demand. Finally, Services are expected to grow but decelerate y/y, something we think that’s been anticipated but remains a factor. Outperform. $190. 

Wamsi Mohan, BofA Securities: Solid quarter; Wide range for guidance reflects conservatism. The company noted cautionary headwinds around June qtr guide including on a sequential incremental basis 100bps from FX, 100bps from Russia, and estimated $3- $7bn from supply chain headwinds (see our guidance scenarios in Fig 1). We remain bullish given (1) Phone demand remains strong globally (ex-lockdown impact in China), (2) Mix remains positive in iPhone, (3) Channel inventory levels remain at lower end of range across products, (4) Services headwinds persist another qtr but compares get easier post that, (5) gross margins are strong and structurally headed higher (faster services growth vs. prod if mix remains similar), (6) commitment to capital return/increased dividend, and (8) potential M&A to drive innovation and growth. Buy. $215. 

Katy Huberty, Morgan Stanley: Platform Story Intact; China Reopening Key to June Q Upside. March marked a second consecutive clean quarter for Apple, as all segments but iPad grew Y/Y, with Mac, Wearables and Services all growing double digits Y/Y and iPhone, Mac and Wearables reaching a March quarter revenue record. June quarter demand commentary struck us as notably more positive than other consumer reports this earnings season, with underlying demand trends suggesting Y/Y revenue growth in the June quarter could be in- line to slightly stronger than the March quarter (of 9% Y/Y). Overweight. To $195 from $120.

Matin Yang, Oppenheimer: Record 2Q22 Results, Macro Headwinds Rising. March results were better than analyst consensus despite tougher macro challenges. F2Q22 was another record setting quarter, as Apple’s active device installed base and software services reach all-time-high across product categories and geographies. Highlights of this quarter include reaccelerating revenue growth in Americas (up 19% Y/Y), and Services gross margin achieving all-time-high. Mac and iPad, while suffering from supply constraints, continue to see 50% of buyers who are new to the product. Business outlook in the near-term turns more challenging due to additonal macro headwinds from FX movement and lockdown in Shanghai. Visibility regarding chip shortage also remains low. That said, Apple continues to outperform competitors with superior products and margins, more so when macro environment are rough. Outperform. $190.

Abhinav Davuluri, Morningstar: Despite Solid March Quarter Results, Looming Supply Constraints Look Daunting for Apple. Narrow-moat Apple reported fiscal second-quarter results that came in ahead of our estimates despite supply chain constraints and the ongoing chip shortage. Demand for the firm’s latest iPhone 13 and MacBook Pro drove record iPhone and Mac revenue for the March quarter. We remain positive on Apple’s ability to extract sales from its installed base via new products and services. However, management expects June quarter revenue to be $4 billion-$8 billion lower than usual because of supply constraints stemming from COVID-19-related disruptions, the ongoing chip shortage, softer customer demand in China, foreign exchange headwinds, and a pause in sales in Russia. Shares fell about 2% during after-hours trading but remain above our unchanged fair value estimate of $130 per share.

Kyle McNealy, Jefferies: A Lot to Like Here, the Supply Chain Guidance Isn’t That Bad. This was the more negative and less enthusiastic part of the print. However, we don’t think it’s as bad as it sounds. The company expects $4-8bn in negative impact from supply constraints, a deceleration in Y/Y growth for Services, a 300 bps Y/Y FX headwind, and 150 bps Y/Y headwind from halted sales in Russia. After making a few of our own assumptions, we estimate that the guidance implies approximately $82.1bn-$87.7bn in June sales or $84.9bn at the midpoint. That implies 4.2% Y/Y growth and comes in 2% below the $86.3bn consensus. On the bottom line, this translates to approximately $1.19 in EPS which is 4% below the $1.24 consensus. Overall, that’s not that bad given that before the print, options were implying a 2.3% downward stock move and likely a low-single-digit earnings miss. Buy. $200. 

Daniel Ives, Wedbush: Delivers Strong Quarter With Demand Holding Firm; China Shutdowns a Headwind. While not giving detailed guidance for the June quarter, Cook & Co. talked about strong continued demand for iPhones with healthy double-digit services growth. The albatross for the June quarter not surprisingly was the Covid lockdowns in China which will negatively impact revenue by between $4 billion and $8 billion as a headwind. This is a wide range given the variability and unknowns still ahead around China and the supply chain, coupled with ripple impacts of demand in the key China region during the quarter. Our view is that the quarter was much stronger than expected with demand remaining firm despite macro headwinds. Outperform. $200. 

Gene Munster, Loup Ventures: Apple’s Supply Chain Chatter Hides the Big Picture. Supply constraints. It seems like that’s the only topic on the minds of Apple investors these days. In fact, it’s nothing new. Since the launch of the iPod twenty years ago, navigating the theme of product availability has been an essential part of investing in Apple. It’s a well traveled road: Apple releases a new product and it takes 2-4 months for supply to catch up with demand… The conversation of supply chain is important because it masks the pace of intrinsic growth, making it difficult to discern the health of the business. I believe the topic has been blown out of proportion, now somewhat of an investor distraction vortex, as is evidenced by the number of times Apple has mentioned ‘supply chain’ on earnings calls.

Harsh Kumar, Piper Sandler: Transitory Headwinds Overshadow Strong Business Trends. In our view, the guidance may be considered a disappointment for all the wrong reasons. In the June quarter, Apple is being impacted by two transitory, nonoperational issues: 1) a 150 bps headwind from the sales ban on Russia and 2) another 300 bps headwind from FX. In addition, the company is facing a $4 billion to $8 billion headwind from COVID shutdowns in China and silicon shortages. The company’s fundamentals seem to be headed in the right direction, but the short-term transitory impacts are distorting June quarter results. Overweight. Target to $195 from $200. 

Amit Daryanani, Evercore: Even Goliath Feels The Supply Chain Pain. AAPL reported impressive upside vs. street expectations with march-qtr rev/EPS coming in at $97B/$1.52 vs. street at $94B/$1.42 as 9% top-line growth was driven by positive performance across all categories except iPad with strong growth from Services (+17% y/y), MacBook (+15%) and Wearables (+12%)… Apple did not provide a revenue guide, but they flag a few factors that will impact the top line: 1) $4-$8B in supply constraints, 2) FX will be a 300bps headwind, 3) Pausing Russian sales is a 150bps headwind, 4) Services growth will decelerate but still be up y/y. Outperform. $210. 

Kyle McNealy, Jefferies: Good Results Given Supply, Mac Stands Out & China Still Strong. China revenue was strong once again at $25.8bn (+3% Y/Y). Strong results came in for all geographies. We’ve been hearing in our discussions with industry contacts that Apple is now the leading smartphone vendor in China. It’s not natural for Apple to be the biggest share gainer from Huawei as it takes an operating system switch from Android to iOS. However, we think other OEMs in China (Vivo, Oppo, Xiaomi, and Honor) have such little experience and success selling premium phones it leaves a door open for Apple. Buy. $200.

Sami Badri, Credit Suisse. Underlying Demand Intact But Incremental Pressures For June Q. Apple’s broader ecosystem is supported by Services & a growing installed base, while the company works through supply constraints. That said, increasing macro uncertainty and inflationary pressures will likely result in lower product demand during C2022 (Product accounted for 81% and 52% of C2021 revenue and GP, respectively). Neutral. Target to $169 from $168. 

Sidney Ho, Deutsche Bank: Buy. Target to $200 from $210.  

 

28 Comments

  1. Miguel Ancira said:
    lots of supply chain ‘chatter’, but all of their targets near $200…I like it

    3
    April 29, 2022
  2. Greg Lippert said:
    None of the “constraints” have anything to do with demand. If supply constrained, purchases will be delayed, not cancelled.

    Apple will navigate these waters better than anyone.

    That next quarters earnings will still show y/y growth is an extreme ++++

    3
    April 29, 2022
  3. Fred Stein said:
    With 825M paid subscriptions up 165M, we’ll hit 1B, approx, next Q.

    Apple remains a growth story. The Five Easy Pieces article shows it.

    At current stock prices, the $90B buyback adds 3.4% to the organic EPS growth.

    Finally, 2/3 of the Apple Watch sales are new customers. That’s phenomenal.

    4
    April 29, 2022
  4. Steven Philips said:
    Interesting that with all the MSM seeming to talk about inflation and recession that I didn’t see that as part of any of the analyst’s equations.
    Seems like IF it’s a thing that it could/would have a negative effect on demand.
    Not sure what to make of this. Any thoughts? A non issue?

    1
    April 29, 2022
  5. Bob Goldstein said:
    @Joe, my apologies for questioning your replies, but over the last 13 years when Apple started the buybacks, the big tech companies have done spectacularly well. Some of them more recently have started buybacks but not to the extent as Apple. Over the last few months I would guess all the tech stocks have dropped including a 20% Apple drop. Netflix is a different story, I think they may be down over 70% from their high, but I would still not count Reed Hastings out. I have no doubt Apple will eventually hit $180 again and eventually hit new highs. I think it’s probably a good bet that Amazon will recover and that Alphabet will do well in the future. Microsoft has been doing well, Meta will probably regain it’s losses.
    From day one you convinced me that buybacks were the way to go but I’m not so sure now. As I have said all the big tech companies have skyrocketed in the same time frame as Apple without spending billions on buybacks.
    I’m still in favor of buybacks to neutralize share creep. I feel I am in a win/win situation, in that I don’t worry at all when shares go down as I know Apple will be buying cheaper shares.
    I would just like the ratio of dividends/buybacks to shift to give something back to the older long term holders who may not have years left to enjoy a much higher share price.
    My apologies again for questioning you, I have the highest regard for your comments starting when you were Sacto Joe, and I truly believe that you are a must read

    0
    April 30, 2022
    • Robert Paul Leitao said:
      Bob: I appreciate your perspective. What Joe believes works for Joe won’t work for you and doesn’t work for me. Each person has a unique set of priorities and needs. I do a lot of research and frequently post the outcome of my research in the Other Stocks channel of the Apple 3.0 Slack group. I actively follow over 100 equities at this time and through the use of custom screeners and the information resources available through my investment firm, I can keep current on the equities I follow. While I personally believe Apple is an amazing enterprise, it hasn’t come up on my top-level screeners in years. That’s not because there’s anything “wrong” with Apple. Actually, it’s quite the contrary. It just doesn’t necessarily align with my current investment objectives. That’s due in part to the very low dividend yield. I do not recommend anyone choosing to invest in equities to place all of their dollars in one equity. While the chance might be slim with Apple, there’s always the risk of a black swan event unique to an enterprise. In my view, it’s best to be aware of opportunities in the market by researching trends, economic conditions and other enterprises with strong growth potential and in different market sectors. As you have learned through your research, there are other enterprises in the tech sector that have performed well and without huge buybacks programs in place. Several have attractive growth trajectories and provide appealing returns to shareholders through comparatively higher dividend yields. Again, there’s nothing “wrong” with Apple. I’m confidant of that not only because of a personal fascination with and affinity for the company’s products and services, but because of what my research reveals. An individual’s investment needs do change over time and in response to changes in personal circumstances. There’s nothing wrong with that. Like you, I’d like Apple to modestly adjust its capital return allocation for the benefit of investors that desire a current income component to their investment returns. I believe a capital return allocation of 30% dividends/70% share repurchases at this time would serve the interests of current shareholders and prospective shareholders. Interest rates are rising and with rising interest rates the opportunity costs of investing in equities also rise. In my view, raising the dividend yield would attract more investors and open the shares to purchase by growth & income funds. In other words, the increase in the share price due to greater demand for shares from a higher dividend yield would benefit all investors. It’s OK if Joe or anyone else disagrees.I respect and appreciate everyone’s points of view.

      0
      April 30, 2022
      • Bob Goldstein said:
        @Robert, Thank you for your thoughtful reply. I agree with everything you said. I do track tech as I have a mutual fund that is heavily weighted in tech.
        I still see great things ahead for Apple, I agree with Munster. There could be a black swan but even then if there was a 70/30 split Apple would scoop up cheap shares and we would all do well as long as the fundamentals stay in place. I hope we don’t have to wait too many years for the 70/30 split

        1
        April 30, 2022
  6. Roger Schutte said:
    I don’t understand what’s the difference or benefit to receiving forced dividends on 4 days of the year over having the option to sell some appreciated shares any day of the year? Dividends and long term capital gains are taxed the same, right? So, why is increasing taxes of ALL shareholders better than giving shareholders the choice in the matter?

    1
    May 1, 2022
    • Troy Thoman said:
      Not only that but for long-term shareholders, Apple taking float off the table will allow them to pay a higher div with the same percentage of free cash flow being used at some point in the future if the stock is ever “overvalued.” I personally would welcome them taking 5 billion shares off the market over the next 10 years. At one point there were 26.5B shares out there (in 2013)… now there is like 16.3B out there. Almost 40% of the shares were taken off the market. If AAPL didn’t buy those shares back the stock price would be $96.98 to make the same market cap.

      1
      May 1, 2022
      • Robert Paul Leitao said:
        Troy: I made that argument for years. Nearly 10 years following the resumption of dividends and the creation of the massive share repurchase program, the dividend yield is about 0.58%. That’s after removing roughly 40% of the fully diluted share count from the market over the past nine years. No one in this comment stream is suggesting Apple cease repurchases in favor of capital return through dividends alone. I’ve suggest a 30% allocation of the capital returned to dividends and 70% to repurchases. That would work out to about $70 billion in repurchases and net cash settlements per annum and $30 billion to dividends. In today’s trading range that would work out to a still lowly 1.1% dividend yield at $160 per share, a still moderate 32.6% distribution of the prior fiscal year’s net profits and over 446 million shares removed from the market at $160 per share. Again, no one is suggesting Apple cease share repurchases. A modest reallocation of the capital returned is all that is suggested.

        0
        May 1, 2022
    • Robert Paul Leitao said:
      Roger: That might work if the share price was constant or always moving higher. The value of a dividend is one of the things the market can’t take back through a change in share pricing. Not all shareholders pay taxes including non-profits, public pension funds and individuals holding funds in Roth IRAs. Owners of shares held in 401(k)s and traditional IRAs realize gains only upon withdrawal and when gains are realized there’s no difference in the tax rate for short-term gains, long-term gains and dividend distributions. Following your logic, what’s the point of having a dividend at all? Shareholders always have the choice of reinvesting dividends in more shares if they choose. Making corporate policy decisions on the basis of someone else’s tax rate or tax situation that is unknown to management is not the best way to guide a company. It’s not management’s asset. Let each shareholder decide how to invest their portion of the company’s profits distributed through dividends.

      0
      May 1, 2022
    • Bob Goldstein said:
      @Roger, The answer for me is very simple. Every dollar of dividends either goes to more shares or money in my pocket. If I had to sell shares for income it would mean less shares for me, meaning I no longer will get share appreciation for every share that I sell. As I drip my IRA account I get more shares in IRA, and more cash to spend in my taxable account. If I sell shares now for more income it means less shares for dividends. I also plan to leave my shares to my family so I want more shares, not less for them. I have never advocated for the buybacks to end. I just want the ratio to change. My overall goal has always been to increase my holdings by dripping, to have the share price to continue to rise and to have more money from dividends to increase our cash flow.

      0
      May 1, 2022
  7. Robert Paul Leitao said:
    When I research equities for purchase I usually have a 2% dividend minimum. I’ll occasionally make an exception for what I consider to be a conspicuous opportunity, but that’s not frequent. If an enterprise has a repurchase program in place I will take note and usually view it a positive. Moat ratings, analyst ratings and dividend yields are far more important for my investment purposes than share repurchase programs. I think Apple is an amazing enterprise. I also believe the company is missing out on investors and mutual funds such as growth & income funds that have dividend yield minimums. Again, no one is suggesting Apple cease repurchases. I am suggesting a change in the capital return allocation mix. Ideally, I’d like to see a dividend yield maintained as much as possible of at least 1%. The last I checked, the DJIA, of which Apple is a component, had an average yield of 1.64%. As of March 31st, the average yield of the S&P 500, of which Apple is a major component, was 1.37%. Even allocating 30% of the capital return funds from just over 14% of the total today would create a dividend yield of about 1.2% at $160 per share. Even with the recently announced $.23 per quarter divided rate or $.92 per annum, yields only 0.575% per annum at $160 per share. Different people have different objectives and not everyone can afford to solely wait on perceived future share price growth potential to meet their needs.

    0
    May 1, 2022

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