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Apple says supply constraints worse than expected in Q4

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Neuberger Berman Managing Director Dan Flax joins the Yahoo Finance Live panel to discuss Apple's earnings results.

Video Transcript

DAN FLAX: It would appear-- and we'll get more color shortly from the management team on the call-- but it would appear that the supply chain is having an impact on Apple, like it is with all other companies. I expect that to be a continued headwind in the near term. Clearly the services results suggest that they're executing nicely there.

I think the bigger story here beyond the short-term results and, of course, the near-term supply-chain dynamics is really this notion of can they continue to innovate and create great product? And their track record to date, including with the recent announcements around the Mac the other day with the new silicon, suggests that they can.

And so the innovation, the execution on the product cycles, even in the face of these supply-chain shortages-- clearly difficult compares over the next year. If they can do that, I think this company can create additional shareholder value over the next one to two years.

SEANA SMITH: Yeah, and Dan, going off that, Apple saying that services and Mac revenue reaching all-time highs. To what extent do you think that's going to offset some of the supply-chain worries that we were just talking about specifically when it comes to the iPhone?

DAN FLAX: I think the iPhone supply-chain challenges are going to be with us for the next few months and perhaps further. We saw last year what happened. The company was very late with the product, but the product was innovative, and they saw good demand. So far, there appears to be decent demand for the new iPhone 13. We'll obviously get additional information in the coming weeks.

I think the performance of iPhone is going to remain critical to the stock, even with the strength in Mac. But overall, I think what will matter for iPhone is that the install base is growing and it's continuing to delight users, even in the face of obviously what are tougher numbers for the recent quarter.

SEANA SMITH: Yeah, Dan, we have tougher comps and also stiff competition. I guess concerns just about market saturation when it comes to iPhone. How do you view that?

DAN FLAX: I think it's a risk. It's been part of the industry challenge over the last few years as the market has gotten more mature. I think one of the changes is we are now embarking on a new cycle with this 5G, really this next generation of connectivity. And so if you look at that, we are actually in the very early innings of that cycle.

I think specific to Apple, the key is that they're able to continue to innovate given how fierce competition is. I think the fact that they've been able to execute on this product cycle, at least initially insofar as the launch-- there's a lot of innovation in key areas like the camera, video. I think the broader ecosystem-- really this integration of the hardware, the software, and the services-- that is what helps to create the magic of the Apple experience and ultimately contributes to growth in the install base, which is key to the longer-term dynamics in the story.

SEANA SMITH: Well, Dan, this drop of just around, what, 4%-- just over 4%, about 4 and 1/2% here after hours. Would you be a buyer of Apple then at these levels?

DAN FLAX: I think the stock is attractive at current levels, and I say that because we're seeing a lot of innovation. We're seeing strong execution on the product cycles.

I think as we look past next year and into 2023, which is really the basis of my comments, we will see that Apple is likely to be able to execute through these supply challenges and continue to deliver new products and new services that delight their customers. That's really the key to the story, in my view. And so I think the stock is attractive here at current levels for those who want to look a little bit further out.

SEANA SMITH: And Dan, one other thing that you did note in your recent note, you said that you think that the health-care opportunity is underappreciated. I guess how big of an opportunity is this potentially for Apple?

DAN FLAX: I think it's pretty significant. We see, for example, in the Watch, you have the ECG or electrocardiogram app. You have emergency calling for people who fall. The new iOS, or operating system for the iPhone, has something to monitor walking steadiness, which is important to many people. If one is able to measure and see perhaps a level of degradation, that can help people take action.

You're also seeing, for example, Apple is coordinating and working with hospitals, research organizations, universities for studying ways that they can help in areas like women's health, mental health, sleep. So there's a lot that's going on here from a health-care standpoint.

And if we think about the importance for the Watch as an example in health and fitness, that's really one of the key drivers of why people buy the product, why people enjoy the product and get value from it. So I think that is a very important piece of the underlying story, and it will manifest itself both in the product and then also in more services over time.

SEANA SMITH: All right, Dan, stick with us. We want to get over-- back over to Jared Blikre who has some more headlines for us. Jared.

JARED BLIKRE: That's right, specifically dealing with the supply constraints, and let me just tick off a few of these. So Apple is saying that the supply constraints in the quarter-- which are, by the way, in the fourth quarter, the current one, could cost $6 billion. Those are coming from chip shortages and a spike in COVID in Southeast Asia. They're expecting this to continue. That's going to result in larger headwinds for the-- excuse me, for the fourth quarter, which is the $6 billion I was just talking about. So we know we've been talking about this with respect to a number of analysts and also the effects industrywide and across industries, for that matter.

One other headline that caught my eye, Apple returned over $24 billion to shareholders during the quarter. We know that there have been some big buyback announcements that shareholders have liked, but I'm not seeing anything new with respect to them changing their program just yet, but still digging through the report, Seana.

SEANA SMITH: All right, Jared, thanks so much. Dan, just going back to you on this because still, even though it seems like there is a lot of positive-- a lot of encouraging signs within this report, yet we're seeing the stock off almost 5%. Is this a bit of an overreaction?

DAN FLAX: I think it's reasonable given where the actual numbers came in relative to expectations. We'll get a little bit more color on the call in terms of the specific impact they may be able to provide in terms of the supply chain and how it impacted the quarter.

The other piece that we don't know too much about is that the iPhone was just launched, and so we'll have a better sense as to perhaps channel fill towards the end of the recent quarter or not, as it were, given the supply constraints.

So there are a lot of moving pieces, and clearly, to the comments Jared made around this next quarter, the impact of semiconductor and other component shortages. That's going to impact Apple and, of course, a lot of other companies for the foreseeable future.

What companies can control better is their ability to innovate and drive forward the product experience. I think that is going to be what matters to customers. Think about newer areas like augmented reality as one example.

If they're able to drive that forward, that, in my view, is going to help create opportunities for the company to grow. Again, perhaps not in the very short term, and we have the dynamics with difficult compares. But for those who want to look out into late '22 and really into 2023, I do think there is continued growth here.

SEANA SMITH: Dan, certainly a lot of interest on the supply issues in this earnings call that's going to get underway not too long from now, but what else are you going to be specifically listening for?

DAN FLAX: I'm going to try and get a better sense of what's going on inside the services business. I think the App Store probably is healthy overall, although as more people return to work, to school, you could see some moderation in some of that digital consumption, as it were.

I'm also going to try and get a sense as to how the Apple Care is doing. As stores open up, probably you're going to have more people going in.

So the different pieces-- the number of paid subscriptions, we're going to get additional detail on that. Those metrics are important because that really attests to the fact that Apple is able to develop new offerings. There's TV. That's Arcade for gaming. These are newer businesses for the company, and if they're able to add value to the customers, Apple is going to be able to drive incremental revenue.

The other piece that's important is by having more services-- Apple Pay is an example. If they're things that strengthen the ecosystem, that helps with overall customer retention and also helps attract new users-- new customers to the overall Apple ecosystem, which is ultimately important for longer-term growth.

SEANA SMITH: All right, Dan Flax of Neuberger Berman, managing director there, thanks so much for taking the time to join us.