Current Price: $149 Price Target: $166
Position Size: 6.7% (our smallest active position)TTM Performance: +29%
Key Takeaways:
- Issues with supply, not demand: quarterly results and guidance are being negatively impacted by supply chain constraints, but they continue to see record demand. The revenue miss for the quarter was entirely supply driven (semi shortages and Covid related manufacturing disruptions in southeast Asia).
- China continues to be strong – +83% YoY growth, significantly growing the installed base.
- Guidance – Supply constraints will be a bigger impact in Q1 (December quarter) than in Q4, but still expect to set a new revenue record for the December quarter. Supply constraints will be biggest w/ iPad – expect YoY revenue growth for each product category, except for iPad. Expect Services growth to decelerate. Expect gross margin to be between 41.5 and 42.5% (from <40% in 2020).
Additional highlights:
- Seeing record demand – Q4 revenue was $83.4B, +29%, putting FY revenue at $366B, +33%, with record performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020.….despite larger-than-expected supply constraints.
- Margins expanding – gross margins are up significantly YoY (but down sequentially) aided by higher margin Services. Services gross margin hit an all-time high of 70.5%, up 70bps sequentially, mainly due to a different mix.
- Supply constraints:
- Impacted Q4 by $6B which was much bigger than their revenue miss.
- Q1 (December quarter) will see an even bigger impact.
- Key issues were semi shortages and Covid related manufacturing disruptions. The semi shortages will continue, but the factory closures are improving. Chip shortages impacting iPhone, iPad and Mac.
- Shortages are in legacy nodes (these are less sophisticated chips and less in their control b/c they have proprietary leading edge chips, but not their own legacy chips). “In terms of the chip shortage, the chip shortage is happening on legacy nodes, primarily we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply and it’s difficult to forecast when those things will balance, because you’d have to know kind of how the economy is going to be in 2022 and the accuracy of everyone else demand projections. And so I don’t feel comfortable in making a prediction.”
- Segments:
- iPhone – $39B in Q4 revenue, up +47% YoY. The iPhone 13 family was introduced and is in very high demand. Installed base is >1 billion devices.
- Mac – this quarter was all time record and the last five quarters for Mac have been its best four quarters ever. Revenues were up +2% YoY despite supply constraints.
- iPad – up 21% in spite of significant supply constraints. On the 9th generation iPad, powered by the M1 chip.
- Wearables – grew 12% YoY. Nearly 75% of Apple Watch buyers were new to the product. This quarter, they introduced Apple Watch 7.
- Strong Services growth driven by growing installed base –
- Revenue +26% YoY; set a new all-time revenue record ($18.3B in Q4; $68B for FY21).
- All-time record for cloud services, music, video, advertising, AppleCare and payment services
- Now at 745m subs, added 45m from Q3; and up 160m from last yr. and 5x the number of subs they had less than 5yrs. ago.
- Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility
- Introduced Apple Podcast subscriptions last quarter
- 5G upgrade cycle – only in the early innings of 5G. If you look at their 5G penetration around the world, there is only a couple of countries that are in the double digits yet.
- Why we still like…
- Big moat underpinned by growing installed base which drives their virtuous cycle.. More users of their devices lures developers to create better apps which lures more users. This is key to their LT growth. Apple continues to significantly expand their installed base. And they have multiple new products being launched and more in the pipeline (e.g. AR glasses, Apple car) that could be key drivers of LT growth….and, importantly, a growing services business tied to all these products. Part of what differentiates Apple is they design their own silicon for the processor chips that are the brains of their iPhones and iPads and now their Macs, which gives them better control over performance and feature integration in their devices. This has proven to give them an advantage with the way they design their products and an advantage with developers. So, now they have Macs, iPhones and iPads running the same underlying technology which should make it easier for Apple to unify its apps ecosystem, including allowing iPhone and iPad apps to run on Macs. This advantage and the relevance of their ecosystem gets more and more important as computing power in phones increases, 5G delivers better connectivity and, as a result, we have the ability to use their devices in enhanced ways (w/ increased revenue opportunities) ….like apps that take advantage of augmented reality and IoT related technologies.
- Apple is still not expensive…
- Trading at >4% FCF yield on 2022 (in line w/ S&P) and a 0.6% dividend yield w/ another almost 3% of their market cap ($66B) in net cash on their balance sheet.
- For reference, pre-pandemic in Jan 2020, Apple was trading at ~4.7% FCF yield and 1% dividend yield with ~7% of their market cap in net cash.
- Their market cap has been tracking their massive increase in FCF estimates.
- Huge amount of cash on their balance sheet w/ years of buybacks to support valuation
- Capital returns may need to expand further to hit their net-cash-neutral target in a few years.
- With current net cash of ~$66B and expectations of nearly $450B of FCF over the next 4 years, shareholder returns could be ~$500B or >20% of their current market cap.
- They’ve returned >$530B since 2012. So, from 2012 to 2026, they may return >$1T.
$AAPL.US
[category earnings]
[tag AAPL]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109