Why Canaccord Genuity expects 'solid' Q3 results

"The company is likely managing the supply challenges better than the industry." -- Analyst T. Michael Walkley

From a note to clients that landed on my desktop.

Ahead of Apple’s earnings report on Thursday, July 28, after the market close, we anticipate solid Q3/F2022 results and adjust our below consensus estimates to
reflect improving supply conditions and resilient iPhone demand.

We also anticipate improving iPad sales in part due to improving supply and believe Apple’s $4B-$8B supply headwind commentary for the June quarter was more likely at the lower-end of this range.

We believe Apple is well-positioned to continue to benefit from the 5G upgrade cycle and believe iPhone demand has proven more resilient than our below consensus estimates. Apple’s ecosystem approach, including an installed base that exceeds 1.8B devices globally with over 1B iPhone users, should continue to generate ongoing healthy services growth.

Longer term, we expect the higher-margin services revenue growth to outpace total company growth and drive gross margin expansion. With $73B in net cash, Apple has a strong balance sheet to continue to invest and support long-term growth. We anticipate strong customer retention to continue to drive results as the company is likely managing the supply challenges better than the industry. With the 5G upgrade cycle likely a benefit for the next several years, other hardware categories growing double-digits, and continued mix shift towards high-margin services, we believe the share price is compelling for longer-term investors.

Maintains Buy rating and $200 price target.

My take: One of the more optimistic June quarter walk-ups.

11 Comments

  1. Speaking of new high-margin services, Herbert Diess is stepping down as CEO of the largest carmaker, VW. According to DW German public news: “Among Diess’ failures was his inability to develop a proprietary software system at the German carmaker. Tens of thousands of IT workers are trying to develop a VW operating system that can be installed in all the company’s car brands. Tesla already has this, Google and Apple do too.”
    Reading the tea leaves, I’m certain every automaker (fuel or EV) struggles with software cost & complexity, especially given today’s interconnected car designs.
    DW writer Henrik Böhme enlightens us, “ In fact, this is one of the greatest fears of established car companies like VW. That, in the end, they will only build the things that wrap around the software, and the IT will actually be what makes the difference and the money. This would mean that whoever provides the software gets all the driver data, along with the cash that comes with it.” Queue CarPlay iOS 16… or would you rather trust Baidu CarLife with your vehicle data? I don’t trust most car manufacturer’s infotainment software now, still buggy!
    (DW link in follow-up post)

    8
    July 23, 2022
    • Gregg Thurman said:
      in the end, they will only build the things that wrap around the software,

      This is what I speculated when Apple introduced CarPlay 2.0 last month.

      Apple doesn’t have to manufacture the whole car, and, by far, most car manufacturers don’t have the talent or user interface (UI) chops to develop a proprietary infotainment OS/System.

      Given current buyer preference for cars equipped with CarPlay, I’d venture Apple already owns this space. How would that translate to dollars for the system and recurring subscription revenue from cars built by the 10 smallest vehicle manufacturers?

      5
      July 23, 2022
    • Bart Yee said:
      Considering VW & Audi (and to a lesser extent, Porsche) software involvement in VW’s dieselgate, I still wouldn’t trust VW to do it right. Dieselgate developed under Matin Winterkorn who led Audi before becoming VW CEO in 2007-2015 when dieselgate was unmasked – he remains a fugitive from justice and trial in the US for violating US emissions laws because Germany will not extradite their citizens. His trial in Germany was supposed to start in Sept. 2021 but has been delayed because of Winterkorn’s health at age 74 – so he’s avoided court for 7 years and counting.

      Meanwhile Mathias Müller, then head of Porsche, was appointed VW Chairman in 2015 to clean up the mess, only to be ousted himself in 2018 for clashes with the VW powers that be, namely the Porsche and Piech families, the powerful German labor unions (who have board reps), and the German states (Lower Saxony) that also have powerful board representation to maintain or grow jobs VW higher overall costs to VW and its divisions.

      There has always been management drama and conflicting engineering, environmental, and financial views / goals, and methods at VW, leading or stemming from it convoluted ownership and board control. That Diess is now being ousted after 4 years isn’t particularly unusual, nor is tapping yet another Porsche CEO, Oliver Blume) to lead VW again. Whether he will be successful remains to be seen.

      1
      July 24, 2022
      • Bart Yee said:
        The upshot of all the above is the insular nature and perhaps arrogant engineering views of German car makers (even my beloved Porsche) makes them believe they alone can create the software to manage the car better than any other (RE: Tesla and / or Apple). VW can build cars but can they do software? – Apple can do software (mostly) but can they build cars (not for want of trying)?

        And then could either work together with each other or others – neither would give up control, credit, or ego? So hard to say how Apple can offer value vs perceived threat of usurping any automakers’ prestige – apparently a rife viewpoint from all the male dominated automaker (and Apple) management viewpoints.

        1
        July 24, 2022
        • David Emery said:
          [Palm CEO] Colligan laughed off the idea that any company — including the wildly popular Apple Computer — could easily win customers in the finicky smart-phone sector. ‘We’ve learned and struggled for a few years here figuring out how to make a decent phone,’ he said. ‘PC guys are not going to just figure this out. They’re not going to just walk in.’”

          And it’s not just German car makers that have that belief. A friend spent some time in GM doing software (related to OnCall), he got disgusted and went back to his Civil Service job doing software for tanks.

          2
          July 24, 2022
  2. Manufacturer commits to CarPlay in x number of models. Annual license per model includes software updates coordinated with parts/chip suppliers. Apple gets 25% of car model compatible app revenue. Siri helps with everything, like in my office. Apple has access to audio or video advertising for front and rear passengers, inside various apps passengers use. Driver buys EV Battery Extender & Moose in Fog detector apps in App Store on Day 1. Puts on iVision glasses with AR when driving or walking through National Wildlife Refuges, spots rare species. Babies are never left in hot cars again.

    5
    July 23, 2022
    • Steven Philips said:
      I thought it was “Moose and Squirrel” ! 🙂

      1
      July 24, 2022
  3. Dan Scropos said:
    Loose number—$1.39 eps.

    2
    July 23, 2022
    • Gregg Thurman said:
      Loose number—$1.39 eps.

      2030. That’s a conservative estimate.

      2
      July 24, 2022
      • Dan Scropos said:
        Ha! I see most estimates ranging from $1.10 to $1.19.

        My view is that Mac, iPhone and Services will surprise, while iPad will still “disappoint” due to chip deferral elsewhere. The wildcard is ForEx.

        4
        July 24, 2022

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