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.
Apple will navigate these waters better than anyone.
That next quarters earnings will still show y/y growth is an extreme ++++
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.
So as I see it, allocating the bulk of their free cash into buybacks is great for the younger longs who have years to wait for the share appreciation. For older people who have already seen tremendous share price appreciation, who may not have years ahead to enjoy the money, it is not a massive gift. I am looking forward to the day when Apple changes the ratio of buybacks/dividends
“I do well on the dividends, they pay for both my children’s higher education without loans, the four of us rotate on buying new cars so I pay cash for the cars, pay our high taxes, bills, and have enough left over for certain luxuries.“
If you’re doing all that with just your Apple dividends, you’d have to be pulling in dividends worth on the order of $100,000 to $200,000/year, which, at a dividend rate of $1/share, would mean you presently own somewhere between (157×100000=) $15.7 M and 15.7×2=) $31.4 M worth of Apple.
But Apple has bought back what must be close to half the shares in their float over the years, shares which you say you’ve never sold. That means that you presently own about a 2X bigger slice of Apple pie than you would have owned without buybacks. But don’t believe me: Just ask Warren Buffett how that works….
Of course, you’d have a LOT more dividend income, but you would have also paid a considerable tax on that – and even more tax if the dividend came out of a retirement account that taxes money leaving as income.
More importantly, since it is provable that AAPL’s price follows EPS, which is positively impacted by the lowering share count, the stock would be at a substantially lower price per share than is presently the case.
I could go on, but why bother. You’ve clearly never realized your amazing good fortune in buying and holding AAPL.
And this little 20% drop? Please! You’ve been around long enough to know that doesn’t mean a hill of beans, in the long run. And if you don’t know that, then why the heck are you even that deeply invested in Steve Jobs’ little fruit company?
I don’t have the financial background or the technical background that most people on this site have but I did understand the potential of what OS X could be when Steve said it was portable and made a very large bet on Apple based on that. At that time a lot of people thought Apple was about to go bankrupt. I also was intuitive enough to go against all of the prevailing conventional wisdom of not putting all your eggs in one basket, trim the winners, take profits, rebalance etc. I was also steady enough not to sell shares when the stock crashed so many times over the years. I do think that because of this I was able to create wealth for my family and I that I am correct in wanting to see more cash now while I am still alive and able to enjoy it
I am very grateful to Apple and I know that Tim Cook and management has created tremendous wealth for shareholders. I do think the decision to put so much of the free cash into buybacks benefits the younger long term shareholders at the expense of aging shareholders who would like to enjoy a greater quarterly cash flow.
You have stated that you sell shares to live on. I don’t understand your thinking about buybacks. I know that you are older than I am. You have stated that you sell shares to maintain your standard of living. Every share you sell means less money to you if the shares do increase in value over the years. Would it not be to your advantage to have a change in the buyback/dividend ratio so you have more cash each quarter so that you either don’t have to sell shares or sell less shares?
I have probably read every comment you have made from day one of Braeburn and now this blog, so I have the highest respect for you and know that you have added so much of your knowledge to both groups.
“Would it not be to your advantage to have a change in the buyback/dividend ratio so you have more cash each quarter so that you either don’t have to sell shares or sell less shares?”
That’s an excellent question, and thanks not only for your kind words but for asking it!
The short answer is “no”. I admit that it is counter-intuitive. But I am convinced that, AT THIS TIME, buybacks are going to be far more valuable to Donna and I going forward than buybacks. Yes, to the younger investors, but to we in the older generation as well.
In PED’s latest article, “Daniel Tello’s Apple 3.0 essay contest (prize value: $200)”, I suggest a way to calculate the difference made possible by buybacks vs dividends.
(I did leave out one thing: To make a scrupulously fair comparison, one would also need to calculate the impact if ALL cash was returned by buybacks and NONE by dividends.)
The gist is this: putting the cash into dividends alone would never have saved us, even if it all went into dividends. The folks who would have been saved would have alteady needed enough AAPL to live off of their dividends alone, with a few borderline cases in either direction.
I suspect that you already had “minimal mass”. And over the years, Apple increased the dividend just enough to set up where your presently are.
I still don’t, even if Apple chooses to go 100% dividend.
But.
I have seen our nest egg earlier in the year about 4X bigger than it was just before buybacks started. Since you haven’t had to sell a single share, your ROI must be significantly larger. And only a relatively small part of that ROI is down to dividends.
So consider this: Assume all the assumptions I laid out in comments to the PED article I mention above. Determine that growth difference in monetary terms, but assume ALL the money had gone into buybacks. Calculate the probable difference in dividends you’d have received, And assume that you spend all your vastly increased dividend income creating an “alternate reality” of “really good times”, probably including buying even more shares of AAPL back with the surplus.
Then do the same “alternate reality”, but this time using cash from shares you sold out of your account, on a quarterly basis, equal to the theoretical dividends you received.
Finally, look at your two fictional share counts and share prices projected to now, and calculate which path netted you the bigger remnant fortune. Note that far more Apple “float” will be in the “dividend alternate reality” than in the “sell AAPL alternate reality”, and that I’d maintain that the EPS would be far, far lower as well.
I also see the other large tech companies also soaring in price over the last 10 years without or limited buybacks.
I don’t think that at my age, and you are older, that we have unlimited time to wait for the share price to make another dramatic increase. Is it not better to have more cash when we are alive and able to enjoy it. I know it’s my choice not to sell shares if I want more money but I do believe the shares are going much higher based on products in development etc, so I don’t see the point at all in selling.
I did forget to mention in my previous comment to you that I do in fact make a lot in dividends, that the tax consequence that you always mention is really not too bad. I pay, I think around 20% in my taxable account and I have a lot of shares in an IRA account that I currently don’t pay tax on as I haven’t sold shares. When I talked about my cash flow from dividends I forgot to mention that I drip the IRA so I have less to spend than my total dividend amount.
First, forget other companies. Their “success”, as I say elsewhere to you, is down to the largely casino market and a massive helping of hype.
EPS, upon which Apple’s valuation is lagely based, is made of a numerator, share count, and a denominator, earnings or net income. As Robert Leitao and I concluded many years ago now, buybacks without growth are meaningless. Thus, absent buybacks, AAPL’s stock price (vagaries of the market aside) would be far lower by now than otherwise.
So no, I am absolutely NOT saying that “Apple plowing back almost all the free cash to buybacks caused this”. But it’s a relatively easy calculation to see the impact it HAS had on stock price over the years, and it’s substantial.
To find the EPS, simply get past net income numbers and calculate EPS if the stock count had remained stable.
“For investors working from within tax-deferred retirements accounts there’s no difference in the tax rates paid on dividends or long-term capital gains.”
Say what? ANY income pulled out of a tax- deferred account is counted as income, not cap gains, and taxed higher accordingly. Well, maybe not if you’re REALLY well-off, but we already know those folks are leaning on the rest of us and not remotely paying their fair share….
“…not everyone can afford to wait years to benefit….”
Without the buybacks, we’d be far worse off. Period.
We’re presently watching our largely speculator (i.e. short term) market crumble away value based on said pure speculation. Well, that and a whole ton of hype trying to cover up reality suddenly being forced to admit the emperor has no clothes.
Fully clothed Apple, in the meantime, was beseiged by false memes, which also are being stripped away.
Also, Alphabet and, to a lesser degree, Microsoft, have begun emulating Apple’s massive buyback strategy, as revealed in their shrinking stock count. Probably others as well. I’d guess that’s what’s gotten all the Congress-Critters riled up….
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?
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
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