What Wall Street is saying about Apple ahead of earnings

Apple tries to extend streak of quarterly beats amid worries about iPhone production, next catalyst

Apple (AAPL) is scheduled to report first fiscal quarter results after the market close on Thursday, February 2, with a conference call scheduled for 5:00 pm ET. What to watch for:

"TOUGH SETUP": Last quarter, Apple beat consensus sales and earnings expectations for a fourth quarter in a row, reporting EPS of $1.29 on Q4 revenue of $90.10B, which compared to consensus forecasts of $1.17 and $88.90B, respectively.

Apple CFO Luca Maestri said in the earnings release, "Our record September quarter results continue to demonstrate our ability to execute effectively in spite of a challenging and volatile macroeconomic backdrop. We continued to invest in our long-term growth plans, generated over $24 billion in operating cash flow, and returned over $29 billion to our shareholders during the quarter. The strength of our ecosystem, unmatched customer loyalty, and record sales spurred our active installed base of devices to a new all-time high."

Subsequent to that report, JPMorgan analyst Samik Chatterjee said Apple’s fiscal Q4 was resilient, with iPhone revenue still constrained by supply and Services challenged by currency and macro impact, while Mac and Wearables were better on pent-up demand and recent product cycle strength. The company’s "resilience to a tough macro through the mix of Products and Services is likely to drive a re-rating," Chatterjee argued.

More recently, Chatterjee lowered the firm’s price target on Apple to $180 from $190 and kept an Overweight rating on the shares, telling investors that he sees the company facing "a tough setup" for its upcoming earnings report given that supply headwinds faced though the December quarter are now leading and extending into demand concerns for the March quarter. Chatterjee expects to see moderating momentum in the demand drivers for Apple’s hardware as signs emerge of product cycle tailwinds beginning to fade and the analyst expects revenue and earnings in fiscal Q1 to track modestly below consensus expectations. His target cut reflects both lower estimates as well as more bearish sentiment relative to the demand outlook, Chatterjee noted.

In a more positive take issued on January 27, Evercore ISI analyst Amit Daryanani noted LVMH (LVMUY) was upbeat on its China outlook when the company reported earnings and Burberry (BURBY) noted the prior week that it was seeing "very promising" signs of recovery and was "very positive about the early signs" in China as well. These comments, along with Cartier owner Richemont’s similar sentiment, are "encouraging" for Apple as iPhone sales "should generally track the broader luxury market in China," the firm said. Evercore, which expects Apple’s lost December quarter sales to be recovered in the March quarter and has increased confidence that Apple’s March quarter guidance will be "comfortably ahead of consensus," kept an Outperform rating and $190 price target on Apple shares.

Current consensus EPS and revenue forecasts for Apple’s December quarter stand at $1.94 and $121.1B, respectively, according to data provided by Refinitiv. That earnings estimate for the fiscal first quarter is down from where it stood 90 days ago at $2.08 per share, according to Refinitiv.

PRODUCTION PROBLEMS: On November 6, Apple warned: "COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity. As we have done throughout the COVID-19 pandemic, we are prioritizing the health and safety of the workers in our supply chain. We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models. However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products. We are working closely with our supplier to return to normal production levels while ensuring the health and safety of every worker."

In early December, The Wall Street Journal’s Yang Jie and Aaron Tilley reported, citing people familiar with the matter, that Apple was accelerating plans to shift some of its production outside China, long the dominant country in the supply chain that built the world’s most valuable company. It is telling suppliers to plan more actively for assembling Apple products elsewhere in Asia, particularly India and Vietnam, sources told the Journal. Apple is also looking to reduce dependence on Taiwanese assemblers led by Foxconn (HNHPF), the report said.

More recently, on December 29, The Wall Street Journal’s Yang Jie, citing analysts and people involved in the supply chain, reported that Apple’s iPhone production in China was beginning to catch up to demand for the more-expensive Pro models. Despite COVID-19 issues in China that were still hampering manufacturing, Foxconn, Apple’s sole assembler of high-end iPhone models, said it ended the movement restrictions at its Zhengzhou facility and the parts of the facility that produce iPhones have recovered to be operating at about 70% capacity, according to the report.

On January 3, Exane BNP Paribas analyst Jerome Ramel downgraded Apple to Neutral from Outperform with a price target of $140, down from $180. The analyst cut iPhone and Mac shipment estimates following the "well flagged production disruption" at Apple’s Foxconn factory and citing "more caution" on consumer spending. With new products such as Apple Car and a virtual reality headset "not imminent," Apple’s growth outlook "seems insufficient to justify a valuation premium to platform peers," the analyst told investors. The firm sees no major positive catalyst for the stock and believes Apple was fairly valued at then-current levels.

INSOURCING: In addition to reports regarding Apple’s production problems and its response, there have been a number of stories recently regarding an insourcing trend at the company for its components.

On January 9, Bloomberg’s Mark Gurman reported that Apple’s efforts to replace chips inside its devices with components made in-house will include dropping a key Broadcom (AVGO) part in 2025, citing people familiar with the situation. As part of the push, the iPhone maker also seeks to ready its first cellular modem chip by the end of 2024 or early 2025, letting it swap out components from Qualcomm (QCOM), the author said.

Piper Sandler analyst Harsh Kumar noted that Broadcom shares were down after Bloomberg said Apple will begin to make its own version of Broadcom’s Wi-Fi combo chip by 2025. The analyst thinks this is inconsistent with Apple’s strategy of only focusing on strategic chips for internal manufacturing, for example compute. In his opinion, the only reason for insourcing Qualcomm’s modem is Apple’s objection to royalty payments to Qualcomm. Further, Kumar sees nothing strategic to Apple in developing a Wi-Fi + Bluetooth combo chip. While important, he believes it is also very capably produced by Broadcom and Apple is able to procure it with reasonable economics.

Meanwhile, BofA analyst Vivek Arya also noted Bloomberg report that Apple will begin developing in-house Wi-Fi/Bluetooth chips with eyes on replacing a Broadcom socket by 2025 as well as replacing Qualcomm modems by 2024. Arya estimates that Broadcom supplies Apple with roughly $30 of content per device. Assuming about $5-$10 of content at risk, he estimates about a $1.5B-$2.5B potential impact on the topline, but adds that this could be reduced if the company were to complete its pending acquisition of VMWare (VMW). While saying "any loss of business at a prominent customer such as Apple is not a positive," Arya said no impact is expected for the next two-plus years and added that Apple exposure tends to depress trading multiples so less Apple could imply a higher multiple. Arya maintains a Buy rating on Broadcom, calling it "one of our preferred cloud semi vendors."

Following Bloomberg’s report highlighting the company’s intent to insource several iPhone components, Evercore’s Amit Daryanani said the firm’s bull case assumes that Apple can achieve a cost somewhere between what each component currently costs for suppliers and the price it currently pays for each respective component. He thinks the company can achieve 20c-25c per share of annual EPS savings in this scenario, Daryanani noted.

On January 11, Bloomberg’s Mark Gurman reported Apple plans to design and develop its own displays for mobile devices, starting with microLED screens for the Apple Watch Ultra by the end of 2024. The company is looking to reduce its reliance on partners like Samsung (SSNLF) and bring more components in-house, sources told Gurman.

OTHER PRODUCT HEADLINES: During the quarter, other reporting on Apple’s future product roadmap included:

• Apple ramps up work on mixed-reality headset, Bloomberg says [more]
• Apple scales back and delays electric vehicle launch, Bloomberg says [more]
• Apple considering adding touch screens for Macs, Bloomberg says [more]
• Apple working on cheaper version of mixed-reality headset, The Information says [more]
• Apple to expand smart-home lineup with new smart displays, Bloomberg says [more]
• Apple developing software for augmented reality apps, The Information reports [more]
• Apple analyst Ming-Chi Kuo says company to release foldable iPad in 2024 [more]

SENTIMENT: Click here to check out recent Media Buzz Sentiment on Apple as measured by TipRanks.

Keywords: iPhone, iPad, Mac, Apple Watch, earnings, earnings watch, guidance, supply chain, insourcing, China