Apple (AAPL) Looks Crisp As Investors Look Past Supply Issues Causing A Miss On iPhone Sales In Q4

3:34 pm Friday, October 28th, 2022

Apple (AAPL) is looking crisp today, recovering from a sell-the-news reaction after the company reported lower-than-expected iPhone sales in Q4 (Sep). CEO Tim Cook quelled fears of waning demand by citing supply issues as the culprit.

Still, AAPL is not immune to the macroeconomic obstacles weakening demand. CFO Luca Maestri pointed out that digital advertising and gaming are areas where the company is experiencing softness, reiterating comments made by Snap (SNAP), which is seeing the digital advertising market slow, and Take-Two (TTWO), whose mobile gaming division is facing softness. These headwinds will mainly negatively affect AAPL’s Services segment, which it still expects to grow yr/yr in Q1 (Dec), but be impacted by the current economic situation and foreign currency fluctuations.

Speaking of which, FX impacts clipped over 600 bps off AAPL’s revenue growth in Q4. Still, the figure climbed 7.8% yr/yr to $90.15 bln, well ahead of consensus.

Earnings also jumped ahead of analyst expectations in the quarter, gaining 4.0% yr/yr to $1.29 per share. Gross margins setting a Q4 record at 42.3%, which also met AAPL’s prior expectations of 41.5-42.5%, helped the company expand its earnings despite the FX impact drag.

iPhone revs of $42.6 bln, a 10% climb yr/yr, was also a Q4 record. A notable development was exceptional growth in emerging markets, such as India, Vietnam, and Indonesia, which each doubled iPhone sales yr/yr. Although AAPL has been seeing tremendous growth in emerging markets for some time, we like seeing this continue, especially during an economic downturn, as it highlights the company’s ability to translate its marketing prowess and brand power to many different customers and cultures.

The laggard in Q4 was iPad, where revs tumbled 13% yr/yr to $7.2 bln due to FX impacts and an unfavorable comparison from the year-ago period.

Looking ahead to Q1, AAPL still did not provide detailed estimates, noting that it expects revenue growth to decelerate compared to Q4. A significant component of this is FX impacts, which is expected to take nearly 10 pts off growth. Also, a challenging comparison from the year-ago period is setting up Mac sales to substantially decline yr/yr, which will further weigh on overall growth. Gross margins are expected to expand slightly, with AAPL projecting 42.5-43.5%.