PhillipCapital’s Timothy Ang has maintained his buy call and an unchanged target price of US$187 on Apple, as forecasts for the company’s full year revenue and profit after tax and minority interests (PATMI) were in line at 100% and 101% of his FY2021 forecasts respectively.
Apple reported a 4QFY2021 revenue of US$83.3 billion ($112.29 billion), which was 28.8% higher y-o-y. Ang writes that there was a US$6 billion impact on the topline from supply chain constraints.
Gross profit saw a 42.5% jump to US$35.1 billion, while PATMI surged 62.2% to US$20.5 billion.
In his report, Ang notes that some positives from Apple include a robust demand for iPhones.
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“Apple sees strong orders for the iPhone 12 and 13 line up from online and retail stores, carrier channels, and other channels. Upgraders and switchers grew double digits in the quarter.”
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Lead times, a common indicator of demand, are at four weeks for the iPhone 13 Pro and Max, compared to three days for the iPhone 12 Pro Max launched in 2020.
However, Ang thinks this may be skewed by supply constraints. Continued global investments in 5G and aggressive promotions by carriers support the smartphone super cycle story.
In addition, he points out that services growth exceeded expectations. In the 4QFY2021, Apple’s services revenue grew 26% y-o-y to US$18.3 billion compared to the brokerage’s forecast of 18%. FY2021 growth stood at 27% versus PhillipCapital’s 25% forecast.
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Growth was broad-based across all services. Higher margins from services of 70% (vs 35% for products) helped push FY21 gross margins to a 7-year high of 41.8%.
On the other hand, Apple has had to deal with larger-than-expected supply constraints, reiterating the US$6 billion impact on 4QFY2021 revenue from silicon shortages and Covid-19 manufacturing disruptions affecting iPhone, iPad and Mac.
However, he says that Covid-19 disruptions have since eased as Vietnam reopened in late September, but the impact from chip shortages will become more acute come holiday season as sales volume spike, and it will be unclear if lost sales during the holiday season can be recaptured.
Moving forward, he thinks that Apple’s 1QFY2022 revenue impact from supply constraints is expected to be higher than US$6 billion due to larger product volumes during the holiday season.
Despite this, gross margins guidance for 1QFY2022 is still a material increase y-o-y to 41.5%-42.5%, compared to the historical five-year average margin of 39%.
The margin guidance already factors in significantly higher freight costs and higher cost structures from new product launches.
On a broader sector view, Ang notes that global chip shortages caused worldwide smartphone shipments to fall 6% y-o-y in the third quarter of 2021, according to Canalys.
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Despite this, Apple’s smartphone shipments were up 14% y-o-y to 49.2million units, due to strong iPhone 13 demand. In contrast, Samsung’s shipments declined 13% to 69.4million units as it struggled with supply of its Galaxy A series and cancelled a new Samsung Galaxy Note launch this year.
As such, Apple’s share of worldwide smartphone shipments jumped from 12% to 15% while Samsung’s remained stable at 23%. “We believe Apple’s supply chain dominance makes it less exposed to constraints compared to competitors, allowing its market share to expand,” he says.
He believes that there is strong demand for Apple’s 5G iPhones, pointing at the fact that iPhone 13 pre-orders were 20% above the iPhone 12 launched in 2020.
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A potential near-term catalyst would be a successful appeal to delay the App Store ruling coming into effect on 9 December. The ruling allows app developers to give users in the US the option to make payment out of Apple’s App Store, preventing Apple from collecting a fee of 15-30%.
Should the ruling succeed, it could impact 2% of total revenue and 4% of gross profits, and a successful appeal of the ruling could delay it for years.
Shares of Apple closed at US$150.02 on Nov 2, with a FY2022 profit to earnings ratio of 26.9 and a dividend yield of 0.6%.
