Wall Street upbeat on Apple's long-term outlook despite near-term slowness

Wall Street is looking ahead to Apple Inc.'s September results following a June period that is expected to represent the height of the iPhone-maker's supply chain woes.

Apple forecast that component shortages stemming from COVID-19 lockdowns in China will lower revenue for the quarter ended June 30 by between $4 billion and $8 billion. Sales of iPhones in China, one of Apple's key markets, are also expected to have taken a hit. Apple is scheduled to report June quarter earnings on July 28.

However, supply chain woes appear to have peaked in May, clearing the way for a more normal iPhone new release cycle in September, analysts said.

"While the nervous market backdrop is creating a fearful environment for tech stocks, we believe Apple's growth story remains well intact despite the shaky macro," said Wedbush Securities analyst Daniel Ives.

Slowing growth

Apple's year-over-year growth rates have been declining since the June 2021 quarter and plunged to single digits in the March period, when the company reported total revenue of $97.28 billion and net income of $25.01 billion. That followed four quarters of double-digit growth in 2021.

For the June quarter, Apple is expected to post total revenue of $82.97 billion and net income of $19.02 billion, according to S&P Capital IQ estimates. That would represent continued single-digit growth in revenue and a decline in net income on a year-over-year basis.

"We believe constraints have largely been addressed as Apple's contractors significantly ramped factories in June, with peak supply constraints seen in April and May," said Angelo Zino, a senior equity analyst at CFRA Research. The company's June quarter guidance may prove conservative, the analyst said.

New iPhone lineup

Worldwide smartphone shipments fell about 9% year over year in the March quarter due to a combination of inflationary factors, component shortages and logistics delays, according to estimates from Kagan, a media research group within S&P Global Market Intelligence.

Apple reported 5.5% growth in its iPhone sales during the March period, down from 65.5% in the same period a year earlier.

In the June quarter, iPhone sales revenues are estimated at $38.47 billion, down 2.8% year over year based on 47.44 million units sold, according to Daniel Morgan, vice president and senior portfolio manager at Synovus Trust.

Analysts forecast sales to ramp up again after Apple launches its new iPhone 14 smartphones in September. The new lineup, which Apple has yet to announce officially, is expected to include a standard and Pro version at 6.1 inches and a Max and Pro Max version at 6.7 inches each.

The iPhone 14 line is very unlikely to include a "mini" version due to anemic sales of previous models, said Zino.

"The removal of the mini in favor of the Max will alone improve the mix and thus pricing, but we are hard pressed to believe Apple will increase the price of its base models given we are embarking on a potential global recession," Zino said.

Moreover, the base models of the iPhone are expected to include the same A15 chipset used in current iPhone 13 smartphones. Pro models will feature new A16 hardware.

"From an industry standpoint, the decision to retain the A15 in the base model iPhone 14 is a significant change and one that should smooth out supply issues that typically impact Apple when they introduce a new iPhone model, in late Q3 and into Q4," said Ken Hyers, director for emerging device strategies at Strategy Analytics.

Services

Apple's Services segment, which includes the App Store, Apple Music and Apple TV+ platforms, is also experiencing a slowdown in year-over-year revenue growth. Net sales for the segment rose 17.3% to $19.82 billion in the March quarter, compared to 26.6% in the year-ago period, when the company benefited from a sharp rise in its installed base during the pandemic.

Apple guided to even slower services growth in the June quarter, at 13% based on net sales of $19.77 billion.

"As [the pandemic's] tailwinds dissipate and consumers spend less time on their devices versus a year ago, growth rates will be tempered," Zino said. "However, the segment should see a significant upside in revenue growth over the next five years, driven by higher advertising, gaming, and bundling opportunities."

Apple's install base of about 1.8 billion devices gives the company a unique opportunity to cross-sell on its various services.

"Apple's massive install base of users with high loyalty and retention rates creates a recurring service revenue stream that can buffer a slowdown in IT hardware due to rising rates," said Synovus' Morgan.