Apple’s Q3 2022 Earnings Preview: Macro Issues Dominate

Tim Cook, CEO of Apple Inc., speaks at the Apple Worldwide Developers Conference at the Apple Park campus in Cupertino, California, USA on Monday, June 6, 2022.

David Paul Morris | Bloomberg | Getty Images

Apple reports earnings on Thursday for the quarter ending June.

The third quarter of Apple’s fiscal year is usually the lowest in terms of sales. This quarter falls in the second half of the annual iPhone refresh cycle as investors begin to look forward to the release of a new model that will boost revenue starting in late September or October.

This year, analysts and investors will be keeping a close eye on Apple’s earnings in the face of many new macroeconomic trends, including decline in consumer confidencegrowth interest rates as well as inflation high in decades.

So far, Apple’s sales have remained strong, in part because its customers well-to-do group. But still signs that people are putting off buying Macs and iPhones for fear of inflation or a recession, which could have repercussions for the entire economy.

Apple also has significant influence in China, both as a market for its products and as the country where most of its products are assembled. Several of the company’s factories in China have rescheduled or suspended production from time to time during the June quarter due to Covid-19 lockdowns.

Analysts polled by FactSet expect Apple to report $82.8 billion in sales, less than 2% year-over-year growth and the slowest quarterly growth since the pandemic began.

Analysts also expect $1.16 in earnings per share, down 10.7% year on year. Gross margins will also fall from 43.7% last quarter — a historic high for Apple — to 42% to 43%, the company said in April.

Supply chain issues and quarantine in China

In April, Apple’s story was not about demand, but about supply. “Honestly, right now our focus is on supply,” Apple CEO Tim Cook told analysts.

Apple has warned of $4 billion to $8 billion in revenue cuts due to supply issues, including chip shortages and production nights. Some analysts say the iPhone maker will send a signal that it has managed the supply chain well, and the decline in revenue will end up at the lower end of the forecast.

“We believe the company managed its supply chain better than it planned a quarter ago as it continued to build share in a challenging smartphone and PC quarter,” Deutsche Bank analyst Sidney Ho wrote in a recent note.

That could be good for iPad sales, which have fallen hard over the past few quarters as the company has prioritized parts for iPhones and other products.

“We also expect iPad sales to increase in part due to improved supply and believe Apple’s comment about a $4 billion to $8 billion shipping headwind for the June quarter is likely at the lower end of that range,” Canaccord Genuity analyst wrote. T. Michael Walkley in his report. notes this month.

Apple has experienced blackouts in Chinese cities, including Shanghai. Covid restrictions may have hurt Apple’s iPhone sales in China earlier in the quarter, but could lift sales in June as people emerged from quarantine ready to spend.

Analysts polled by FactSet predict Apple sales in Greater China will be around $13.79 billion, down from $14.56 billion a year ago.

September Quarterly Demand

Can Apple remain a safe haven?

Overall, analysts remain confident that Apple is an efficient company with a strong cash balance, loyal customers and competitive products.

But can it remain a safe haven if other tech stocks fall and markets retreat? Apple is down nearly 15% in 2022, but that’s better than the Nasdaq Composite, which is down 18%.

“Apple remains a best-in-class consumer electronics company with the ability to invest through cycles, and with over 60% of revenue more similar to core products in nature, strong brand loyalty, and continuous product/service innovation, we believe that it is better isolated in comparison with analogs. during an economic downturn,” Huberty of Morgan Stanley wrote.

One of the key things for Apple investors amid the economic downturn will be the growth of its services business, which makes overall growth in hardware sales less important. Apple’s services, which include monthly subscriptions, commissions, warranties, search licensing fees from Google, and revenue from the iPhone App Store, also offer higher margins than its core hardware business.

Analysts surveyed by FactSet expect Apple’s services business to grow 12% year-on-year.

This is a slower growth rate than the 17% annual growth the company posted in the second quarter and a significant decrease from the 27% growth Apple posted in its services business in 2021.

Samik Chatterjee of JP Morgan believes that Apple’s share buyback plan will support the company’s shares, even if its earnings are not impressive. Apple advice $90 billion allowed in the form of an additional share repurchase and dividend payment in April.

“We believe that the resilience of earnings estimates amid deteriorating macroeconomic fundamentals, including both inflation and unfavorable exchange rates, will continue to encourage investors to favor Apple with strong cash generation and a balance sheet that will allow it to offset any earnings dilution due to for the macro through ransoms,” Chatterjee wrote in a note.