Apple earnings show ‘better job managing supply chains’: Analyst

D.A. Davidson Managing Director and Senior Research Analyst Tom Forte joins Yahoo Finance to break down Apple’s latest quarterly earnings, how the company is being impacted by supply chain issues, and what it will take to move its market cap higher.

Video Transcript

EMILY MCCORMICK: Tom thank you so much for joining us. Taking a look at these numbers here, record quarterly revenue for Apple at nearly $124 billion. We'd heard some concerns about supply chain constraints during the quarter for this company. What are your main takeaways as you go through this report?

TOM FORTE: Sure. So when you look at the numbers, what initially stands out is that was Apple better able to manage the supply chain disruption? So as you pointed out earlier, it hit them by about $6 billion of revenue this September quarter. And the initial expectation was that it would be more than a $6 billion impact in the December quarter. When you look at the numbers, it seems like they did a better job managing supply chain. I would also say that when you think about the upside on earnings, that suggests to me that they had better than expected iPhone sales.

Generally speaking, their iPhones versus their other hardware have higher margin.

ADAM SHAPIRO: Tom as we look forward, I'm holding an iPhone 8 here, which is going to be due for an upgrade. And there was the whole talk about the replacement cycle before the 13 got launched. With these supply chain issues, we were talking about hundreds of millions of phones that would have been purchased over the next couple of years. Are we still saying hundreds of millions of phones over the next couple of years? Or do we have to scale down the expectation?

TOM FORTE: All right. So first off, I almost fell out of my chair when you said iPhone 8. So I'm still recovering from that. But OK, so from a supply chain standpoint, you talked earlier about the notion that the chip shortage may not be solved in calendar 2022. So I do think it was important that you had significant upgrades in 5G networks from Verizon from AT&T. And I do expect that you're going to have hundreds of millions of iPhones sold on this upgrade cycle. But I do think that unfortunately, the calendar 2022 is going to be another tough year from a chip shortage standpoint. And Apple will be navigating through those challenges.

EMILY MCCORMICK: Apple is continuing to set quarterly records on sales, even with its existing products and annual upgrade cycle that we get every year, a new iteration of the Apple iPhone, a new iteration of the MacBook. But is this product cadence really going to be enough to help keep pushing the stock up further as it nears that $3 trillion market cap yet again?

TOM FORTE: It's a great question. And I really feel like the achievement of $2 trillion was on the excitement over 5G, and that upgrade cycle we just talked about. But I think investors' willingness to drive shares to $3 trillion was really placing bets on future products that the company hasn't talked too much about. One being Apple's more significant entry into the metaverse, something with artificial-- sorry, AR and VR, and then augmented reality, virtual reality. And then second, would Apple ever create its own electronic vehicle?

So I do think that Apple is going to need to have either one or both of those products to continue to move the march higher from a market cap standpoint, and to your earlier question, to sustain its revenue growth.

ADAM SHAPIRO: Tom, I only learned this because of TikTok, the Apple hacks for iPhones. And they've launched the beta version of private relay. I think if I understand it correctly, it's a way to hide your iPhone ID from the websites you're going for. But you have to pay. You have to have iCloud upgrades to get it. What is this saying about what Apple is doing? And by the way, don't you love the camera on the iPhone 8? State of the art.

TOM FORTE: Hopefully you have a big iPhone 8 at least. All right, so on the privacy front, I think clearly Apple over the last couple years has really made privacy a focal point for their company. Now is it possible that they would add privacy as a service where they're charging you extra dollars a month? I do see the logic there. But I do think if you go back to the September quarter, the big challenge for digital advertisers, Facebook, Snapchat, was Apple's leaning into privacy.

So I guess it wouldn't surprise me that they were going to come up with an additional service and charge you a couple month to month to protect your privacy.

EMILY MCCORMICK: When you think geographically, where do you think the biggest growth drivers are going to be for the next year or five years for Apple here? Because I'm taking a look at these results. Again, America is, of course, still the largest sale segment followed by Europe and then greater China. How do you expect that mix to shift potentially over the coming years?

TOM FORTE: It's I think you commented before that the December quarter had north of 20% sales growth in China. And I've kind of looked at China as the proxy for, what could sales growth look like in the US as the 5G upgrade cycle accelerates, when you think about the relative buildout of 5G in China versus the US? So my expectation is that sales growth in the US will accelerate on the 5G network build out here. So I do think on that basis, sales in the Americas, including North America, will become more important. And China could see some slowdown as they upgrade their phones faster than the US.

ADAM SHAPIRO: On the hardware front for Apple, I mean we talk iPhone, iPhone, iPhone. Should we be paying attention to other devices? Is it the watch? I hope they're not going to try and reinvent the-- Google failed with the glasses. But you know where I'm going with that.

TOM FORTE: All right. So I do think that the work from home, learning remotely, things of that nature has reinvigorated growth for the iPad. So I do think that those products are more important now as we continue to make our way through the pandemic. So the hardware story went from being iPhone to really the whole portfolio, including the tablets and the Macs. They've also reinvigorated the Macs by using their own chips. So I think we have to pay more attention. Maybe it won't be Google Glass, but I do expect them to have something that helps you experience augmented reality, virtual reality.

I don't know if it's a direct competitor, Oculus Rift. But that is something that I think is embedded in the stock. Perhaps there's a call up option or how you want to think about it.

EMILY MCCORMICK: Apple this afternoon maintained its target of reaching net cash neutral over time. How do you think Apple gets there? Is it going to be more returning cash to shareholders? Or is it going to be through acquisitions.

TOM FORTE: That's a great question. And there have been articles published recently about if you looked at calendar '21, Google and Amazon in particular had a lot more M&A activity than you would have thought the government would allow, given that the government's talked a lot about getting tougher on big tech, Amazon, Apple, Facebook, and Google. If you look at Amazon and Apple historically, they haven't done a lot of big M&A deals.

So I think it's more about buying back shares, dividends than M&A for Apple.

EMILY MCCORMICK: All right, we'll leave it there for now. Tom Forte is DA Davidson managing director and senior research analyst. And thank you again so much for your time.