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Apple’s earnings miss is ‘psychologically harmful’: Analyst

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Apple reported revenue that fell short of expectations. TECHnalysis Research President and Chief Analyst Bob O'Donnell joins Yahoo Finance Live to discuss.

Video Transcript

AKIKO FUJITA: Let's bring in Bob O'Donnell, TECHnalysis Research president and chief analyst. Bob, let me just get your read specifically on Apple here. As we said, you know, they typically have a very big Q4. There seems to be a lot of concerns about whether they're going to be able to meet demand. How much of this is just a story about a few quarters? How much of this, do you think, lingers well into 2022?

BOB O'DONNELL: Well, I think clearly what we've been hearing from the supply chain on parts is, it's going to linger into '22. So I think we're going to see that impact Apple and a number of other players. You know, the important thing to remember-- and it's sort of an interesting distinction on the supply chain issues-- is that in the case of Apple, it's about getting the parts to manufacture things. In the case of somebody like Amazon, it's getting the goods over, in many cases, from China and other parts of Asia, to sell them. Those are two fundamentally different problems-- related, but not necessarily the same.

And so it's interesting to see kind of both sides of those coins being played out. But to your point, I mean, look, the other thing to remember, I mean, you just put up all those numbers. Every single one of them was positive, right? So that's part of the problem we have with Apple.

And I think, Zack, your point is interesting in terms of how the market's reacting differently. You know, it's all an expectations story with somebody like Apple. They have beat, beat, beat, beat, beat. And so the fact that they didn't beat is more psychologically, I think, harmful than the actual numbers are. And I think perhaps that's why you're seeing the stock being hit a little bit harder.

So I think that's part of the challenge. It's still a record quarter for them. They still have huge demand. The one comment I would make, I mean, iPhone is still a big deal. It's still a huge percentage of the total revenue, as you saw from that chart. And of course, the big push has been around iPhone 12 and 13 and 5G. And if we look certainly here in the US, you know, I mean, yeah, we have 5G service in a few places here and there.

But it's not really doing much for anybody. So that notion that we are going to see a big burst because of 5G and the new capabilities it was going to bring, maybe not. And we just saw-- I just saw yesterday, IDC, I believe it was, came out with their quarterly smartphone shipments, and they were down in Q3. And that's, in some ways, not surprising. Obviously, it's supply chain. But I have to wonder if there's some of that factor playing into this as well.

ZACK GUZMAN: Yeah, I mean, I guess, you know, when we're talking about delays here, too, Goldman, interestingly, was kind of highlighting that consumers could be walking away from purchases when it comes to Apple products because of the lead times. I don't know about that. I would make the push back. I'd be curious to get your take because, you know, I don't know where you turn.

Even myself, it was like, all right, I need an iPhone now because my 10's not treating me well, so I need to go in and get one. They don't have the black one because of supply chain issues, so I got to get the white one. It's not that I'm going to turn away from Apple because we've seen that. So I wonder if that maybe does kind of, I guess, mitigate some of the impacts here.

Because you look at Tesla, as I was saying, we don't see the same reaction in terms of supply chain issues this week. And I guess, you know, that's one that hasn't had as long of a time to prove to investors that there is no alternative. We talk a lot about other auto manufacturers getting into EVs. With phones, Apple's had the lead for a long time.

BOB O'DONNELL: Well, they have. But I mean, look, Samsung here in the US is very strong, right? And, you know, some would argue things like their foldable phones are well ahead of Apple in terms of technology, if you're into that. Of course, a lot of people are into the iOS ecosystem. That's a perfectly understandable thing. They've got a lot of components. And let's not forget those green bubbles because the green bubbles, we all know, is really what makes the difference. Anyway, I'm just kidding. But, you know, you get my point. I mean, the reality is, people are-- they are attached to Apple. And I agree with you, Zack. I think people are going to stick with it. They just have to pick alternatives. They may not get their first choice of iPhone. They may take their second choice.

AKIKO FUJITA: Does Amazon presents a different story? If we're talking about customers potentially running into disruptions on-- you're talking about Apple. Well, what are the other options? And Amazon, it feels like there are many other options, but their competitors are also facing similar concerns. What's the big risk as you look ahead for Amazon in the quarters ahead?

BOB O'DONNELL: Well, I think you pointed it out. I mean, they're going to be spending a lot of money over the next several quarters on their logistics business, on personnel. I mean, you know, we've all seen the ads. They are hiring aggressively and offering very attractive incentives. I mean, they have-- apparently, they had a million people apply for jobs on their career day.

You know, they're offering not only $15 or $18 an hour, depending on where you are in the country, a lot of benefits, reskilling efforts, getting people who have never been in the tech business to move into tech. You could start in a warehouse and end up in a tech job at Amazon. They're doing all kinds of different things along those lines, tuition payments, to really try and attract people. That, obviously, costs them money.

And the other difference with Amazon, you know, when people have problems with shipping containers being stuck on boats, a lot of companies are stuck. Amazon says, all right, fine, then we'll buy a bunch of planes and we'll set up an entire cargo business, which, of course, they've been doing over the last couple of years. And that's a radically different perspective that they can take because they're big enough that they can do that. And that's exactly what they have been doing. And again, it costs a lot of money, but is going to give them the flexibility.

I mean, if you think about it, remember, AWS started out as something that was an internal tool that Apple-- or Amazon then turned into a product. Amazon now is essentially building their own logistics company that certainly, we can imagine down the road, they would make available to other companies as part of a yet another business for Amazon. That's not at all-- I mean, they're kind of doing that to some degree now, but I think we could imagine that being different. That's kind of the difference with what you see Amazon doing versus some of their competitors.

ZACK GUZMAN: Yeah, we were posing this question-- obviously, it's been a very busy earnings week for all these big tech giants. We were posing this question yesterday to one of our guests in terms of which tech company right now has, I guess, the wind at its back. And we've talked a lot about-- Akiko mentioned Microsoft passing Apple here as the most, you know, most valuable company in this space.

I mean, when you look at it now and you're kind of adjusting to these warnings that we have for the current holiday quarter, and you're thinking about, all right, which company here is going to be able to do the most-- you mentioned what Amazon's invested in, in terms of their own, I guess, supply chain here-- who do you think will be able to weather this storm? Because as it's clearly obvious now, it's going to be tough.

BOB O'DONNELL: Well, you know, I think the less capital intensive businesses. So if I have a digital business, clearly, that benefits me. And so, you look to companies like Google, obviously Microsoft. You know, I think those kinds of organizations that have-- I mean, you know, all of those companies do, obviously, have capital in that, just to be clear, you know, especially the cloud companies. They have to invest in the cloud infrastructure.

But, you know, their profit margins on the cloud services are significantly higher because those capital costs are much lower. So I think it's going to be those kinds of companies that are going to benefit. You know, I think we'll see other interesting things come out potentially. You know, look, I know you didn't bring it up, but the whole meta thing, I really-- you could argue maybe Facebook is, of course, one of those companies as well. I think Meta is a horrendous distraction.

ZACK GUZMAN: Ooh.

BOB O'DONNELL: And I don't--

AKIKO FUJITA: Well--

BOB O'DONNELL: --know that-- I mean-- I don't know. We'll see what happens with them.

AKIKO FUJITA: Bob, you read my mind here. You read my mind, because I am curious. It feels like there's two schools of thought around this branding change. You know, some who say, well, this is what Mark Zuckerberg's had his eye on for years and others who say this is just another way to distract from the negative headlines around Facebook, social media platforms. To what extent is there a fundamental shift, you think, happening within the company on what it plans to focus on moving forward?

BOB O'DONNELL: Well, I mean, let's think about, obviously, the best analogy we have is to Google renaming the parent Alphabet. We still-- everybody calls it Google. Hardly anybody uses Alphabet. I imagine we're going to have a similar situation down the road with Facebook because it's not like they renamed the Facebook app or Instagram or WhatsApp or any of the things that people actually use. They did, however, emphasize that they're going to be Meta first.

Now, you know, here's a comment I will make. There's part of me that kind of wonders is, you know, Mark Zuckerberg is so convinced of this, it's because perhaps he's more comfortable in the metaverse than he is in IRL. You know, so, I wonder if there's so much focus there on an area that most people-- you know, I watched-- I'm sure you guys did as well-- the keynote. And a lot of it was really kind of weird and awkward.

And you knew, by the way, oh, they looked very graphical and cool, but it was all a bunch of green screens and people walking around green screens, which, when you physically experience that, is not super cool. The end result looks cool, but while you're doing it, not super cool. And I don't know how many people really want to do that. And yet, they somehow think that's this huge opportunity.

And but they emphasized, the other thing was, hey, this is all many, many, many years off. Well, like, OK, you market wise, certainly people like to hear things that are many, many, many years off because that's too far away for them to really concentrate on. So, I don't know. I have my doubts. I think it will be very confusing for a lot of people. And I think that's a problem.

AKIKO FUJITA: Yeah, I mean, some comparisons being made to Google's big bets, except I think Google was pretty forthcoming in saying, these are big bets. We don't know if they're going to make money. It seems like Facebook is maybe taking a different approach, at least in messaging to investors what the Metaverse is going to mean for the company. Bob, we could talk about this for hours, but we're going to have to cut it short here. Always good to talk to you. Bob O'Donnell, TECHnalysis Research president and chief analyst.