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Apple set to power through chip shortages with steady growth

The global chip shortage is plaguing companies around the globe, and Apple Inc. is no exception. But several industry analysts who follow the company think it will fare better than its competitors due to the combined strength of its market power and burgeoning services business.

Apple in July warned that supply constraints would be greater during its fiscal fourth quarter ended Sept. 30 than in the prior quarter, primarily impacting iPhone and iPad sales. Although the iPhone 13 went on sale in late September and will not have much impact on the company's fiscal fourth-quarter results, analysts expect strong demand for the company's signature smartphone to carry into early next year, as supply constraints limit Apple's ability to sell the device in the current period.

Apple did not respond to a request for comment.

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Pent up demand

Wedbush analyst Daniel Ives estimates Apple will not be able to fulfill orders for at least 5 million iPhone 13 units in the holiday season if consumer demand for the devices maintains its current pace. Still, Ives views the near-term supply chain issues as nothing more than a "speed bump" for the company and reiterated his "outperform" rating and $185 price target on Apple's stock.

"Taking a step back, 5 million to 10 million units moving out of the December quarter into the March quarter due to well-understood supply chain issues is not a worry for us and ultimately speaks to a stronger demand trajectory than the Street had been anticipating," the analyst wrote in a research report.

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Milan Ringol, an analyst at Kagan, a media research group within S&P Global Market Intelligence, said demand for the iPhone 13 will persist through supply shortages, with Apple fans willing to wait rather than buy other smartphones. Ringol expects to see iPhone 13 sales mirror the trajectory of the iPhone 12, for which most of the initial consumer demand for the device overflowed into the March quarter after its fall release.

Loup Ventures analyst Gene Munster noted that it is taking Apple between two weeks and five weeks to deliver iPhone 13s after purchase orders.

"We expect sales growth to go from 31% in September to about 5% in the December quarter," Munster said. "If Apple says they can't keep up with demand, investors will give them a pass, because eventually Apple will win the sale."

Morgan Stanley's Katy Huberty thinks iPhone production shortfalls are being "overblown", however, due to preferential treatment given to Apple by suppliers. Huberty in a research report said Apple's industry-leading profitability allows the company to make bigger orders for materials than its competitors.

Huberty reiterated her "overweight" rating and $168 price target on the company's stock on expectations that Apple will continue to beat Wall Street consensus with its earnings on rising iPhone demand.

New MacBooks

The chip shortages did not stop Apple's ability to roll out all new hardware. The new MacBook Pro line of laptops launched Oct. 26 and continued the company's recent trend of replacing Intel Corp. chips with its proprietary M1 hardware.

Wedbush's Ives calls the new processor a "game-changer" for Apple that could lead to more than 30% of current MacBook users upgrading their laptops over the next year.

"The M1X is essentially a new heavy-duty engine being put in this new MacBook and will be music to the ears of core Mac loyalists awaiting this release," Ives said.

Kagan's Ringol said the new MacBook Pros will draw a lot of interest — not just for the new chips, but also for the return of some traditional ports, like HDMI, that were dropped in 2016 and replaced with Thunderbolt 3 ports.

"Consumers that need a new device immediately will definitely look elsewhere if Apple can't keep supply up," Ringol said. "However, many MacBook users are deeply entrenched in the Apple ecosystem and will likely be willing to wait for new stock to drop."

Bernstein analyst Toni Sacconaghi said the new MacBook Pro's higher prices could boost average selling prices for Macs by 5% or more. But he warned that recent Mac sales were boosted by the pandemic and wonders if "normalized" Mac revenue might be closer to pre-pandemic levels.

Meanwhile, Munster thinks Apple is poised to maintain Mac sales, which now account for 10% of the company's revenue.

"I believe the Mac will sustain that growth over the next few years based on working and learning from anywhere," he said.

Services growth escalates

Although Apple's hardware makes up the bulk of its business, the company's services segment, which includes the App Store, Apple Music and Apple TV+ platforms, is growing more quickly and now boasts much higher profit margins.

The primary driver for services is the App Store, with Apple taking up to a 30% cut from in-app purchases made through its payment system. Following a lawsuit from Fortnite game developer Epic Games Inc., a federal judge ruled that Apple had to give app developers the ability to link to other payment options. Apple is appealing the decision, and its legal battle with Epic Games is set to stretch well into 2022.

Even if Apple were to lose its appeal, analysts do not expect App Store revenue to take much of a hit in the long run.

"Mobile gaming revenue growth slowed down in the first half of 2021, so Apple wants to avoid any additional headwinds, but steering is unlikely to be a significant drag in the near term," said Kagan analyst Neil Barbour. "Most gamers will probably not want to exit the app and enter their credit card information when they could just buy what they want with less friction through Apple."

Jefferies analyst Kyle McNealy wrote in an analyst note that any impact would take time and will not be seen until the June 2022 quarter at the earliest. He believes the injunction could equal a 1% revenue and 4% EPS impact for Apple in 2023 and beyond.

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Meanwhile, Apple's advertising business, which is also bundled into the services segment, could benefit from the company's recent privacy change that restricts how users are tracked on mobile devices. The change, which rolled out in April, is disrupting the online ad market and affecting companies including Facebook Inc. and Snap Inc.

Evercore ISI analyst Amit Daryanani thinks that the disruptions felt by other companies could prove to be beneficial for Apple at the expense of its more established competitors.

"Apple's recent actions may be focused on privacy, but it also creates a very favorable environment as they look to build an advertising business that we think could eventually generate $20 billion in annual revenue," Daryanani said.