Apple Stock: Buy Now and Think Outside the Box (NASDAQ: AAPL)
Apple (NASDAQ: AAPL) the stock has been under pressure since late July 2022, when research firms began reporting disappointing second-quarter smartphone shipments and Micron (MU) released dire forecasts for memory sales following a slowdown in the market. consumer electronics products like smartphones and PCs.
In this article, I present my thesis which suggests that sales of Apple’s flagship smartphones will be better than expected by a deep dive into 1H2022 results, just like its other products, in light of the lack of empirical guidance from ‘Apple for F4Q.
September 7 Apple Event – Earlier than usual, a positive with no supply chain issues
Apple recently sent out invitations to its “Far Out” event to be held at the Steve Jobs Theater in Cupertino, California on September 7. As shown in Table 1, all iPhone events since iPhone 4S in 2011 were introduced later than September 7, 2022, the date of the iPhone 14 event.
This suggests that Apple’s supply chain is under control and can deliver on time. In previous years, several iPhones were introduced later than expected, mostly due to supply chain issues. The iPhone 12 has been delayed due to 5G parts shortages.
Production of last year’s iPhone 13 eventually fell 20% from the original plan in September and October. The root cause of the delays revolved around the need for a vendor ramp of sensor-shift optical image stabilization for all four iPhone 13 models when Apple had only used sensor-shift stabilization on the iPhone 12 Pro Max, while the other models relied on OIS (optical image stabilization).
Even with the development of the iPhone 14, there have been problems in the coating of the camera. The rear cameras supplied by Taiwan’s Genius Electronic Optical Co. have encountered coating quality issues. As a result, Apple had to shift 10 million lens orders to Largan Precision to avoid iPhone 14 shipping delays.
Smartphone shipments may be down, but Apple is up – a bright spot
Much of the negative news surrounding the consumer electronics market is a headline that isn’t well thought out. Indeed, smartphone shipments were down on a year-over-year basis, but Apple shipments were up.
Research firm Counterpoint Research said Apple saw 147% year-over-year growth in the $1,000-plus portion of the smartphone market, accounting for 46% of the total market.
Globally, overall smartphone shipments fell -7% year-on-year to 291 million units in Q2 2022. But Apple shipped 48 million iPhones globally, up +3% year-on-year, for a 16% global market share in Q2 2022, as shown in Chart 1. This is Apple’s highest Q2 market share in the past 10 years, at the expense of major Chinese brands that have been hampered by sluggish domestic and overseas markets. Apple had a strong quarter, led by the iPhone 13 series which continued to increase volumes in the United States, China and other key markets, according to the company.
Will Dour Economy Influence iPhone 14 Sales?
Macroeconomic headwinds have been a challenge for investors, particularly inflation. In the past month since Apple’s F3Q earnings call, those headwinds have eased somewhat. But the reasoning for moving the Apple event to September 7 has raised speculation that it was done in light of economic malaise affecting consumers ahead of further negative news.
I see this decision as an opportunity for Apple to jump start economically its supply chain since its delivery schedule seems stable and smooth. This strategy will help component suppliers financially as layoffs and layoffs loom. It’s also aimed at app developers, many of which are small businesses.
Over the past two weeks, on the positive economic side:
- Consumer confidence rose to 103.2 in August, an increase of 7.9 from the final reading of 95.3 for July.
- Producer prices fell 0.5% in July from the previous month.
- Home prices hit a record high in the second quarter
- US consumer confidence rose in early August to 55.1, continuing its climb from a record low earlier this summer as inflation expectations improved.
- U.S. retail spending was flat in July, and excluding autos and gasoline, spending rose 0.7%.
- Initial jobless claims fell to a seasonally adjusted 250,000 last week, a sign the labor market is holding up.
- Employers in the United States added about 462,000 more jobs in the year through March than the Labor Department originally estimated.
- US GDP fell less than expected in the second quarter, contracting at an annual rate of 0.6% from April to June, from an initial rate of 0.9% earlier.
On the not so positive side:
- Durable goods orders were flat in July as businesses reduced durable goods orders, reflecting a slowdown in demand among other signs of a slowing US economy.
- Consumer spending edged up 0.1% in July as inflation remained near its highest level in four decades.
- New jobless claims, which rose slightly to 262,000 last week, have been on an upward trend since hitting a 50-year low in March.
- Housing starts in the United States fell 9.6% in July from the previous month, as high inflation and higher mortgage rates make it more expensive to build and buy a property.
- Existing home sales in the United States fell in July for the sixth straight month, the longest streak of declines in more than eight years, as rising mortgage rates and a shortage of homes for sale cool the market.
- Businesses reduced their durable goods orders, reflecting a slowdown in demand among other signs of a slowing U.S. economy.
Keep in mind that the above issues relate to the US economy and could be very different globally. The Conference Board predicts global GDP growth of 2.7% for 2022 and 1.7% for 2023.
Given the stronger than expected second quarter data and the upward revisions to the first quarter, the forecast for the full year 2022 is revised upwards for the euro zone. But as headwinds intensify, the Conference Board has lowered its GDP growth estimates for 2023.
The 2022 GDP growth projection for China has been revised down by 0.3 percentage point to account for a weaker-than-expected recovery in services in the second half of the year.
Key takeaway for investors
Apple reported F3Q revenue of $63.4 billion with a record June quarter revenue for the iPhone.
During his F3Q earnings call, according to Luca Maestri – SVP & CFO:
“iPhone revenue grew 3% year-over-year to a June quarter record of $40.7 billion despite currency headwinds as customer response to our iPhone 13 family continues to be strong. We set records for the June quarter in both developed and emerging markets. And the active iPhone installed base reached a new high in all geographies thanks to this level of sales performance combined with unparalleled customer loyalty.
Table 2 shows Apple’s revenue for fiscal years 2020 and 2021 and my estimates for fiscal years 2022 through 2024. I expect that for fiscal year 2022, only iPad will be impacted by slowing demand for consumer electronics. audience. Apart from this data measure, the revenue of each product line will increase every year.
Apple’s services revenue reaches $112 billion in fiscal year 2024. Importantly, services will reach 25.6% of total revenue in fiscal year 2024, up from 18.7% in fiscal 2024. during the 2021 financial year.
The gross margin was guided sequentially downwards (41.5-42.5% against 43.3% at F3Q). Chart 2 shows the meteoric rise in Apple’s gross margins over the past five years. In my view, the possibility of a guided decline matters less given that it’s up 38% in the previous four years.
My main concern is that despite a positive scenario that I have presented in this article, the performance of tech stocks continues to be strongly correlated with the 10-year Treasury rate. I discussed this in detail in my July 1, 2022 Seeking Alpha article titled “Why Are Tech Stocks Selling and What’s the Outlook?”
Chart 3 shows this correlation with Apple stocks. US Treasury yields rose again after Fed Chairman Powell signaled further interest rate hikes last week. Uncertainty remains high regarding the evolution of inflation, energy prices, the war in Ukraine and economic policy in China. This led to a corresponding drop in Apple shares.
While the 10-year Treasury rate is rising and is responsible for the decline in technology shares, the two-year Treasury rate is rising faster. As shown in Chart 4, this resulted in an inversion of the yield curve, with a 10-2 year spread at -0.30%.
An inverted yield curve occurs when short-term risks increase. Investors are demanding relatively higher remuneration from short-term Treasuries and long-term expectations for the economy are deteriorating.
There have been six major recessions in the United States, defined by at least two consecutive quarters of negative GDP growth, since 1976. Depicted by shaded panels in the chart below, all six recessions were preceded by a gap of a negative 10-2, and each recession occurred less than two years after the first reversed 10-2 spread.
Apple’s iPhone 14 event on September 7 will provide press with information on performance boost increases beyond the iPhone 13. This appears to be standard operating procedure for Apple with every announced iPhone iteration. . However, it is the backdrop to this event that provides details on the company’s health amid macro concerns.
My attempts to “think outside the box” suggest to readers that the “highlights” in Apple’s event schedule (a positive) and its ancillary performance in iPhone shipments and market share (a positive ) are a buying opportunity for investors.