Apple — Stocks — Earnings
This Fall, Apple Earnings Could Surprise You
Rising services revenue & strengthening moats… This is the Way
Last September, Apple unveiled its new range of iconic iPhones smartphones, alongside new models of iPad and a new Apple Watch. What could it mean for the Q4 2021 of AAPL stock ? Let’s check together.
First, we will talk a bit about the latest Apple keynote stream. Then, we will focus on the revenue details behind Apple Services and how the company is strengthening its moats. All of this could lead to some good surprises in the next earnings results.
A new range of products from Apple, including the iPhone 13
Apple held its much-anticipated autumnal event on September 14, 2021. Following months of speculation, the company and its well-known CEO Tim Cook presented a brand-new bunch of products. Not only new smartphones (iPhone 13 mini, iPhone 13, iPhone 13 Pro and iPhone 13 Pro Max), but also the new Apple Watch 7, the upgraded iPad 9 and an unexpected iPad Mini 6.
At the same time, Apple also highlighted its service portfolio, from Apple TV+ (streaming) to Fitness+ (sport & fitness) and Apple Pay (mobile payment service). As we know, Apple’s strategy relies more and more on these services. Its hardware component only constitutes an entry point, allowing users to dive into a sophisticated software ecosystem. This software component is fluid, pleasant to use, but also renowned for its rather closed nature.
But Apple ecosystem is sometimes described as a golden prison with an open door. You know it’s nice in there, everything is harmonious, and when you are inside you don’t see why you would leave. It’s still possible to leave it, it will be a little difficult, but it’s manageable.
A sales mix slowly moving to services
When a new user enters the Apple ecosystem, it is most often at the cost of expensive equipment. As a reminder, iPhone 13 prices range from $699/€809 (iPhone 13 Mini 128 GB) to $1599/€1839 (iPhone 13 Pro Max 1 TB). Then, the idea is to offer a series of paid services (iCloud, Apple Music, etc.). These have a great advantage from a business point of view : creating recurring streams of revenue for the company. More recurrence and subscriptions means better predictability of turnover. This predictability is much appreciated by investors of all kind!
With home accessories (such as Apple TV) and ready-to-wear (such as AirPods & Apple Watch), services are one of the fastest growing annual categories since 2016, with an average growth of 20% year-on-year! Last year, net sales from services mainly increased thanks to the App Store, advertising and cloud services. And in the third quarter of 2021 (the latest quarter), services revenue represented just over 21% of Apple’s total worldwide revenue. Nearly double compared to the full year 2016 (11%).
Whereas in the past Apple relied on its hardware segment (mainly supported by the iPhone), services segment and ecosystem built by Apple are now much more resilient in the long run. Apple users appreciate the user interface (UI) & user experience (UX) of their products, the intelligent integration of all individual equipment and services into the ecosystem, and more. It seems very difficult, if not almost impossible, to replace them.
This is a powerful “high switching cost” moat built by the company. It is even more remarkable that it is built on top of its first and historic “intangible assets” competitive advantage.
In the future, Apple should also focus on services around health (thanks to Apple Watch) and payment (through Apple Pay). In the latter, a 2020 study showed good room for improvement as “only” 507 million users actively used Apple Pay last year, nearly 51% of the total installed base of iPhone.
This leaves another 500 million users to bring in this payment segment. If successful, the company will further strengthen its hardware and software ecosystem, which will further increase customer loyalty. And this, while promoting new products and services that will launch in the forthcoming years. Snowball effect.
Be prepared for potentially surprising Q4 2021 quarterly results
Apple remains one of the largest companies in the world, owning the world’s most popular brand, according to Interbrand. After its tremendous success, competitive advantages and its wide range of income streams, the company could present excellent figures during next earnings on October 28, 2021.
According to JP Morgan analyst Samik Chatterjee, iPhone 13 sales volumes are expected to exceed investors’ low expectations for the current cycle ($194.2 billion in sales in 2021, according to FactSet). In addition, he expects growth in services to remain robust, in the 20–25% range.
According to another note published by Wedbush at Barron’s, despite an iPhone 13 not seen as innovative enough compared to the iPhone 12, the first indicators of demand seem positive. Wedbush estimates global pre-orders are running 20% ahead compared to last year’s iPhone 12 models.
However, we will not be able to fully appreciate the success of the iPhone 13 in the next Q4 2021 figures, given the tight timing between the quarterly close and the release of the smartphone (a fortnight). But experts know that sales related to products using the Apple M1 chip (Mac 2020 & 2021, iPad Pro 5), Apple TV 4K and AirTags must be watched closely. These products having been put on sale during the 3rd quarter of 2021, they will be fully recognized in this 4th quarter.
Final words
Either way, interest in the iPhone 13 coupled with low sales expectations might lead to a positive earnings surprise. Especially since Apple had not provided forecasts last quarter, due to pandemic uncertainties. Note that during last earnings (3rd quarter 2021, Q3 2021), Apple announced a revenue of 81.43 billion dollars, up 36% year-on-year, and a profit of 21.74 billion dollars.
As usual, Apple will livestream its Q4 2021 results presentation on its investor relations website.
Raphaël is the founder of Investiforum.fr, a financial website for French-speaking private investors. He owns shares of Apple. This article was originally issued on Investiforum, the financial website for French-speaking private investors. Read the original article (in French).
This article is for educational and entertainment purposes only and should not be considered as financial or legal advice. Not all information will be accurate, but all the data is sourced. Consult a professional before making any significant financial decisions. This article should not be seen as an incentive to buy or sell any of the securities mentioned therein.
