How inflation will affect Apple

An employee checks out an Apple iPhone as a store for shoppers in an Apple store.

Mike Segar | Reuters

Last time Apple faced with such an inflationary environment, it was a public company for less than a year, with its best-selling product being the Apple II home computer.

In May annual inflation rate in the US was 8.6%, the highest level since 1981. Apple’s other major sales markets are experiencing similar or even higher inflation rates.

Apple is facing rising costs for global logistics and employee pay increases, as well as the possibility that consumers will delay upgrading their iPhones due to declining purchasing power. Apple is also facing supply restrictions related to the shutdown of operations in China this year, which could lead to $8 billion profit.

Many firms, especially those with pricing power, can pass on increased costs to their customers by raising prices, especially when demand is high. Apple hasn’t raised iPhone prices in the US, but regularly settings pricing around the world in response to currency fluctuations. A few years ago, Apple changed the pricing structure for its new devices.

Apple could also absorb some of the costs by lowering its margins while keeping prices stable so as not to dampen demand.

“In terms of inflation, we are seeing inflation,” Apple CEO said. Tim Cook told investors income call in April. “This is evident in our gross margin last quarter and in our operating expenses last quarter, and the guidance suggests that [CFO] Luke [Maestri] gave for this quarter. So we’re definitely seeing some level of inflation that I think everyone sees.”

Rising costs

Cook said there are at least two places on a company’s balance sheet where inflation shows up: gross profit and operating expenses.

Apple’s gross profit for the quarter was 43.7%, higher than analysts’ expectations but marginally lower than the December quarter, which was the highest since 2012, according to FactSet data.

Apple’s margins will decline in the June quarter to between 42% and 43%, Maestri said. But Apple’s margins have increased during the pandemic and are still at an elevated level historically.

Operating expenses for the quarter were $12.58 billion, up nearly 19% year-over-year. In the June quarter, Apple forecasts a sequential increase in operating expenses to about $12.8 billion.

Tim Cook performs onstage at the TIME100 Summit 2022 at the Jazz at Lincoln Center.

Jemal Countess | Getty Images Entertainment | Getty Images

Transportation costs are one of the sources of these costs.

“Trucking is a huge problem,” Cook said in April. “In terms of inflation and in terms of affordability.”

Another increase in costs stems from silicon shortages caused by China’s Covid-19 lockdown in the first half of the year and a general shortage of less advanced chips needed to manufacture products. However, Cook said some components are becoming less expensive.

Apple may also face increased labor costs. The company raises wages to its corporate and retail employees in response to market conditions after certain competitors, including Google, Amazonas well as Microsoftmade changes to their compensation earlier this year to attract and retain top tech talent.

“Other companies we follow are lacking margins due to cost inflation, but Apple sees its cost basket as relatively stable as lower commodity costs offset higher labor and transportation costs,” Morgan analysts said. Stanley Cathy Huberty in a post-earnings note.

Possible slowdown in sales

But spending more is not the worst-case scenario for Apple. The bigger risk is that inflation and other macroeconomic conditions will eventually hurt demand for Apple products.

Traditionally, during a recession or in conditions of reduced purchasing power, consumers postpone purchases of durable goods, including electronics, economists say.

In Apple’s case, this could mean that consumers who bought a phone two or three years ago may decide not to upgrade to the newest model this year and defer spending until economic conditions improve.

“Sometimes you just put down a deposit and put off buying,” said Jim Wilcox, an economist at the University of California, Berkeley. “Waiting and watching is a very sound financial strategy.”

Investors have largely become more confident that Apple customers are loyal and therefore likely to continue to upgrade their devices regularly, but an inflation-driven downturn could challenge that belief, hurting Apple’s multiplier earnings.

“In the case of Apple, they have a very strong ecosystem, their customers are very loyal,” said Bernstein analyst Tony Sacconaghi. said on CNBC This week. “But most of their revenue is generated from product sales and that is mostly provided by repeat customers, and if you get into a recession, customers might delay purchases or delay upgrades. So this income stream is not exactly repetitive, it’s mostly transactional. “

Apple has not signaled yet weakness. The company said in April that demand remains strong and suggested there were no signs of deterioration in consumer confidence. A more serious problem was producing enough output to meet the demand for its products.

But the smartphone and laptop markets are showing some signs of slowing down. The high-end portion of the smartphone market, where Apple sells, is holding up better than the sale basket, although overall phone sales have begun to fall. Micron Technologiesmemory supplier for Apple devices, warned on Thursday that both smartphone and PC sales are expected to be significantly lower than previously estimated due to weakening consumer demand, driven in part by rising global inflation.

According to the latest estimates, unit shipments of so-called premium devices $400 or more were down 8% in the first quarter, compared with 10% for the overall market. from a study of counterpoint.

Wealthy clients soften the blow

Apple can afford some additional costs. Its sales have grown over the past two years, and it maintains healthy margins that its hardware competitors envy.

But Apple may not have to pay those higher costs at all.

Buyers tend to have significant disposable income compared to Android device buyers who tend to choose by price.

In the “ultra-premium” or $1,000+ market, Apple received 66% of shipments during the first quarter, according to Counterpoint.

“With rising global inflation, the entry-level and lower-end segments are likely to be hit the hardest,” Counterpoint researchers write.

A Morgan Stanley survey in June showed that 70% of US consumers plan to cut spending over the next six months due to inflation. But wealthy households — Apple customers — were more positive about their finances and the trajectory of the economy.

“Households with an income of $150k+ are more resilient; the highest spike in layoff plans is among the middle-income cohort,” Morgan Stanley analysts wrote.

Over the past five years, Apple has raised the price of its iPhones several times.

In 2017, Apple introduced a $1,000 high-end iPhone model that attracted a large segment of buyers willing to pay for a more powerful device. More recently, Apple quietly raised prices in 2020 when it raised the starting price of its main, top-selling model, the then iPhone 12, from $699 to $799.

Reuters noted On Friday, Apple raised the price of its flagship phone in Japan by almost a fifth, and the entry-level iPhone 13 now costs the equivalent of $870.

Can the company raise prices again this year on a larger scale? Prepare did not rule it out.

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