Apple to weather supply chain pressures; look to wearables, services for growth

Apple Inc. is expected to report continued growth in its hardware sales for the just-ended March quarter as the company's self-made chips position it to better weather the supply chain constraints faced by competitors.

As iPhone sales mature, however, the company will turn to other parts of its business to fuel much of its gains. Wearables are expected to report the fastest growth among its hardware, at about 11.2%, according to a research note by Daniel Morgan, senior portfolio manager at Synovus Trust. Apple reported $14.70 billion in wearables sales in the December 2021 quarter, representing about 14% of its overall hardware sales.

IPhone sales, which are expected to be roughly flat year over year, accounted for about 69% of last quarter's total.

IPad sales, which brought in the least amount of revenue in the December quarter, are expected to rebound somewhat in the March period, with growth of 8.9%, Morgan wrote.

Supply chain solutions

Apple is uniquely positioned in its ability to produce its own semiconductors because of its deep pockets, noted analysts Mike Paxton and Milan Ringol of Kagan, a media research group within S&P Global Market Intelligence.

"Having their own chips enables them to have a firmer grip on the development of their products and reduces some reliance on third-party component manufacturers, which could be an advantage in the long run," Ringol said.

The tech giant's M1 chip line also is more efficient in terms of power consumption and is more cost effective, Paxton said.

Apple's semiconductor production is also important for the company amidst supply chain backlogs at China's largest port driven by strict public health lockdowns, Ringol noted.

Even after the current crisis abates, the diversification of Apple's supply chain is an important development to watch over the long-term, Paxton said.

"They've been moving manufacturing and assembly operations to places like Vietnam, Malaysia and India, trying to get some of the supply chains out of China," Paxton said. "That's going to take a decade plus to move more and more of their manufacturing and assembly operations out of China. ... But instead of 90%, it might be 65% in 10 years."

Growth beyond iPhone

IPhone sales revenues for Apple's March quarter are expected to ring in at $48.01 billion, up 0.2% year over year, said Synovus Trust's Morgan. Wearables, meanwhile, are expected to drive about $8.71 billion in sales.

The company's strongest growth is expected to come from services, not hardware. Morgan estimated Apple's services segment would report $19.9 billion in revenue, up 17.8% year over year. That is slower than in recent quarters but would still beat expected growth from all other Apple segments.

Apple can leverage its 1.8 billion active devices to sell its Apple Care, Apple Pay, and music and TV streaming subscriptions even as iPhone sales mature, Morgan noted.

"Apple's massive installation base with high loyalty and retention rates creates a recurring service revenue stream that can buffer a slowdown in IT hardware due to rising rates," the analyst said.

Apple could also look to other devices to bolster its wearables sales, such as augmented reality and virtual reality glasses, said Ross Gerber, CEO and founder of Gerber Kawasaki Wealth and Investment Management.

"I'm super bullish on that as a product for Apple," Gerber said. "There's a huge part of the entertainment market that hasn't really been maximized. I see it as a huge opportunity for Apple to combine the hardware and software expertise that they have and really get into the [augmented reality or virtual reality] business."