What Apple’s Earnings Say About the High-End Consumer

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When Apple reports its second-quarter earnings later this week, analysts will be trying to glean important insights about how the high-end consumer feels about its products and services. Despite all the company’s success in selling iPhones, iPads, and Macs, many of these consumers have been disappointed by one aspect of Apple’s recent upgrades: the pricing. For example, the new iPhone X starts at $999—a hefty price point that has caused some people to sit on the sidelines and wait for the next model to come out.

Apple reports earnings tomorrow on its earnings for the June quarter.

The third quarter of Apple’s fiscal year is typically the company’s smallest in sales. The quarter is in the back half of the iPhone’s annual refresh cycle as investors start to look forward to the release of a new model, which boosts revenue starting in late September or October.

Analysts and investors will closely follow Apple’s earnings this year as a result of several new macroeconomic trends, including declining consumer confidence, rising interest rates and decades-high inflation.

Apple has so far kept their sales steady by having affluent customers, but if people stop buying Macs and iPhones for the reasons mentioned above, the entire economy could take a dive.

There are lots of risk in China, the market and place that puts together the majority of Apple’s goods. Because of Covid-19 shutdowns, factories producing Apple products temporarily lost production.

Analysts polled by FactSet estimate that Apple will have $82.8 billion in sales. That would be under 2% growth from the same quarter last year and the slowest quarterly increase since the beginning of the pandemic.

Analysts expect Apple to earn $1.16 per share, which would be a 10.7% decline on an annual basis. The company said in April that gross margin will decline from 43.7% last quarter to 42% to 43%.

Lockdowns in China and supply issues

As April draws to a close, the story of Apple isn’t really about how in-demand the company is, but rather how difficult it is to actually get an iPhone at all. CEO Tim Cook told analysts last week that Apple’s main focus at the moment is the supply side.

Due to supply shortages, Apple expects to take a hit in revenues that ranges from $4 billion to $8 billion. In all likelihood, Apple will express that they did well at keeping track of the supply chain, with the low end of the estimated revenue range being more accurate.

Deutsche Bank analyst Sidney Ho said the company did a better job of managing its supply chain and has increased its share in an otherwise difficult market for smartphones and PCs.

That may be good for sales of the iPad, which have been relatively poor in the last few quarters, due to Apple prioritizing parts for iPhones and other products.

We anticipate improving iPad sales partly due to increased availability, and think Apple’s supply headwind of $4 to $8 billion for the current quarter was more likely at the lower end of this range.

Earlier this year, Apple faced shutdowns in urban China, including in Shanghai. The restrictions could have hurt Apple’s iPhone sales in China early in the quarter, but could have helped sales in June as people came out of lockdowns eager to spend.

FactSet’s analysts believe that Apple’s sales in China will be $13.79 billion this year, an unfathomable amount from the $14.56 billion from last year.

The demand in the September quarter

Investors will be paying close attention to what Apple says about consumer sentiment in any region around the world.

We believe industry analysis will be the key focus as we try to gauge the potential impacts to Apple’s earnings in the event of a global downturn in consumer spending, said Wells Fargo analyst Aaron Rakers in a note.

Even Apple’s processor supplier, TSMC, acknowledged that the low- and mid-end markets, where most smartphones and PCs are sold, have been slowing. This means that the more robust high-end market, where Apple predominantly makes its money, is actually more resilient and less susceptible to such fluctuations.

Apple could also signal to us, however, that there may be less demand coming and that would lead to an economic downturn.

Rod Hall of Goldman Sachs observes that high-end demand may be weakening in Europe due to high inflation and a dip in consumer confidence.

It is not expected Apple will slow hiring or cut other costs, unlike Alphabet, Tesla, Microsoft, and Meta. Bloomberg News reports that Apple is slowing down hiring, and some analysts believe that it could talk to management about its strategies for controlling expenses.

Since the outbreak of the pandemic, the tech giant has not provided guidance, citing uncertainty, and some believe this trend will continue.

We should not expect Apple to give quarterly guidance this quarter, but they are likely to provide qualitative commentary, as they have in previous quarters.

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