The Cognitive Dissonance of Unimaginable Public Health Crisis With Stock Markets at All-Time Highs
It’s far above my pay grade to even attempt to make sense of this COVID-19 nightmare, but of course I have to take a moment to acknowledge the tremendous amount of suffering and loss…
…fortunately though, multiple bright lights are at the end of the tunnel, in the form of effective, surprisingly adaptable mRNA vaccines (in the US, Pfizer/BioNTech and Moderna’s vaccines available under FDA emergency use authorization). May the global vaccination campaign proceed as swiftly and safely as possible as the horrible winter wave of COVID-19 appears to have plateaued or crested for now.
In the meantime, we’ll need all the natural defenses against rising new case counts that we can get (if they indeed help mitigate this pandemic).
Apple Proves Itself in Fiscal 2020, Setting Expectations High for the Holiday Quarter
Wait, the Mega-Pricey iPhone Max company? Which is suuuuuper anti-competitive, to hear some tell it?
Never mind $299+ education-pricing iPads or a $399+ iPhone SE sporting a rather capable A13 SoC (y’know, the A13 Bionic in iPhone 11, 11 Pro, and 11 Pro Max). Or that M1 chip offering jaw-dropping performance starting at $699 for the Mac mini.
Undying memes and narratives aside, yes, Apple proved surprisingly pandemic-proof amidst economic conditions that devastated other swaths of industry. Starting with FQ2 2020, more-or-less covering January through March 2020:
Apple didn’t grow revenues much year-over-year, but grow it did ($58 >> $58.3B), despite worldwide lockdowns mostly in the month of March. Revenue declines in mostly iPhone (-$2.1B, -6.7%) and iPad (-$500M, -10.3%) were overcome by the usual strength in Services and Wearables (although Wearables growth has been relatively modest recently).
Of note, $AAPL stock had already bottomed out at a split-adjusted $56 and change in March (oh, right, there was a 4-to-1- stock split on Aug. 28, 2020…about 200 years ago), and was already in the middle of a tremendous, still-ongoing rally as of the March-quarter earnings release.
Work-from-home (“WFH”) begins working its magic on a bunch of tech companies around the world…along with WFH’s cousins “shop-from-home” (Amazon likely the biggest beneficiary), “watch-from-home” (any given Major Streaming Provider™), and “play-from-home” (Nintendo, etc.).
Apple was no different, with Mac’s slight -$160M/-2.9% YOY revenue drop from Q2 2020 reversing to $1.26B/21.6% YOY growth, marking a new all-time Mac revenue record for the June quarter at $7.08B. iPad growth was even more impressive, going from $500M YOY revenue decline to $1.56B/31% revenue growth in a single quarter…narrowly beating out Wearables, Home and Accessories’ $6.45B revenue total by over $100M.
In fact, in this traditional Apple “nadir” quarter, every single revenue geography and every single product line, even iPhone, showed YOY revenue growth! $59.6B in June quarter revenue? That used to be the stuff of December-quarter legend.
Apple strongly hinted at a dip in iPhone revenues due to future iPhone shipping delays during the June-quarter earnings call, and they were right – iPhone line revenue dropped a massive ~$7B YOY, from $33.4B to $26.4B.
But overall Apple revenues still grew over $650M anyway! This was largely thanks to astounding WFH-fueled revenue growth in iPad (+$2.1B/+46% YOY) and even Mac, which grew to an all-time-high $9B in revs for the quarter (29.2% rev growth) despite the pre-announced, not-yet-begun Apple Silicon transition.
Now, it’s not like Apple didn’t launch anything in the first three calendar quarters. Of course the second-gen iPhone SE and MacBook Air + MBP13 refreshes helped. But Apple launched a huge amount of product in September, October and November…which is near-certain to reflect in Apple’s fiscal first half of 2021, if nothing else.
And it all starts with December-quarter results due Wednesday.
“Sneak-Previewing” a Blockbuster FQ1 2021 by Reviewing the Wall Street Consensus
Apple doesn’t give guidance due to the pandemic, but Wall Street analysts continue to estimate their collective best anyway.
And this quarter’s projected to be a doozy. According to Yahoo! Finance (after 1/25/2021 market close), the consensus of 27 professionals is for Apple to ring in $103B in sales, which would be 12% YOY rev growth over the year-ago, then-all-time-high quarterly revenue record of $91.8B.
Over. One hundred. Billion. Dollars. In the middle. Of a pandemic.
Unlike most quarters, I’ll just be providing a “meta-commentary” on that top-line estimate, and devise a WAG scenario that gets us to the $103B consensus to serve as a base for
comic relief further discussion.
First, let’s review the limited guidance Luca Maestri provided for the December quarter. From my contemporaneous earnings call notes:
To organize those thoughts a little + in case that tweet link didn’t load right, Maestri:
- assumed a certain baseline for COVID-19 (which sadly set all kinds of awful records over the winter instead)
- guided to iPhone rev YOY growth vs. FQ1 2020, despite iPhone 12 and 12 Pro shipping on Oct. 23 and iPhone 12 mini/Max shipping on Nov. 13
- made a confident prediction that all other revenue categories (iPad, Mac, Services, and Wearables/Home/Accessories) would be up 10% or more YOY
Next, here’s my for-entertainment-purposes-only “derivation” of the $103B consensus into a sample estimate.
- iPhone: $59.2B (up 6% YOY)
- Mac: $8.7B (up ~21% YOY)
- iPad: $8.4B (up ~40% YOY)
- Wearables/Home/Accessories (“W/H/A” as VERY helpful shorthand): $11.5B (up 15% YOY)
- Services: $15.2B (up ~19% YOY)
- Sample Combined Revs: $103B (up ~12% YOY)
While “working with” my trusty Excel spreadsheet to get this post ready, I ended up with nearly $103B without trying very hard or specifically having the $103B number in mind, so I’ll take that as a sign that I can reasonably approximate “the consensus view”. So let’s run this sample estimate, category by category.
Granted, Maestri’s “we expect iPhone revs to grow YOY” guide could mean anything, but mid-single-digits sounds reasonable, because:
>> Apple’s “mainline” iPhone 12 and iPhone 12 Pro phone launched in late October 2020, around a full month later than we’re used to (in the past, Apple tended to ship and sell new iPhones with mere days or slightly over a week until the end of the September quarter)
>> Apple’s “niche” (?) iPhone 12 mini and 12 Pro Max (which showed early signs of strong demand for a $1099+ device) launched mid-November, the latest any iPhone has ever launched…in a calendar year, that is (around the middle of the to-be-reported December quarter)
This means that Apple’s first full quarter of iPhone 12-series sales is FQ2 2021, and Luca’s guidance implies that overall iPhone 12 demand is just that strong (iPhone 12 mini supply chain rumors aside). That leaves a little room for upside surprise for the December quarter, and a lot of room for optimism for FQ2 2021 (a little more on this later).
WFH continueth, and the New Age of M-chip Macs beginneth! I don’t think the consensus would expect (meta-commentary, get it) all-time-high Mac sales since the December quarter’s well past the typical seasonal back-to-school peak. On the other hand, Macs are riding a major WFH wave (even as some Mac buying may be paused in anticipation of further M-chip changeover) and it may well be foolhardy to bet against it…yet. So why not go with 21% growth, which I think Maestri would describe as “strong double-digits” in his inimitable style.
So about Mac’s recent growth streak. We all remember the iPhone 6s lesson, right? I wouldn’t be too surprised to see “lackluster” Mac growth at some point, given WFH’s inherent effect of “pulling ahead” Mac demand, whether it be from individual consumers or Fortune 500 corporations making massive IT purchases for employees. Everyone buying a Mac in 2020 or 2021 won’t be upgrading all that soon…that’s just how it goes with Mac/PC replacement cycles and macOS software and “extended security” support lifecycles (easily 7 years in many cases).
All that matters longer-term, IMHO, are
>> customer satisfaction (which, Touch Bar and recent butterfly keyboard walkbacks be damned, is a reasonable 93% in the New-and-Improved Scissor-Switch Keyboard Era™) and, relatedly,
>> installed base growth, which will continue as long as Mac users don’t leave the platform for iPad, x86-based Windows, or perhaps other ARM-based non-Apple compute platforms like Qualcomm’s 8cx.
But who knows? Maybe the Intel-to-M-chip transition supercycle will drive an accelerated migration away from Intel Macs. I mean, aside from Win10 support, which Parallels is feverishly trying to address via Microsoft’s ARM64 fork of Win10, Apple’s first M1 Macs have shown themselves to be quieter, cooler, considerably-longer-running on the same battery, reasonably compatible and performant with Intel Macs apps, all that and much faster than any PC in their class. As long as you’re not locked into a mission-critical Intel app/plug-in/workflow situation (a situation that should largely fade away within a year or two), what’s not to like?
I’m guessing that iPad is going to have a triumphant banner year, as it continues to rebound from a relentless multi-year slide in revenues that finally troughed around calendar 2016-2017 (in part because of its insane initial success). Two points first: One, whatever the formerly unsustainable sales pace, iPad is minting all-time highs in installed base in the here and now. Two, even though a projected 40% YOY growth rate to $8.4B in revs is still short of the all-time high of ~$11.5B set in FQ1 2014 (thanks for the quick assist, Statista!)…well, it’s still 40% growth, right? iPad just might be on a comfortable $25B-and-rising annual revenue trajectory before long.
It certainly won’t hurt that the 8th-generation iPad (A12) and redesigned iPad Air A14 launched in September, just in time for iPad’s seasonally strongest quarter.
As with Mac, there is a chance that the iPad WFH Effect could dampen sales momentum in the shorter-term. But iPad Pro and iPad mini are both due for refreshes. And consistently high iPad customer satisfaction, combined with iPadOS’s continued evolution, all bode well for iPad’s future.
Wearables, Home and Accessories had a relatively quiet year. The only new products in calendar 2020 were HomePod mini (Oct. 2020) and AirPods Max (Dec. 2020), so AirPods Max will barely impact sales for FQ1 2021, higher price aside. Fine, there was Watch Series 6 and maybe some new Beats gear, but AirPods wireless audio has been the biggest apparent driver of the audio category (AirPods gen. 2 – Mar. 2019, AirPods Pro – Oct. 2019), and Watch may not be quite the growth driver it once was (we’ll have to see if management gives any Watch-specific clues on Wednesday).
Fine, maybe there’s a few other things, including MagSafe accessories, but c’mon, “dongles and such” have never been particularly large segments of Apple’s overall business.
That’s some pretty “dour” commentary for perfectly respectable double-digit growth, isn’t it? I’m hardly bearish on AirPods or Watch, and HomePod mini seems nice for $99, but I just can’t see any catalysts for W/H/A segment growth without some new AirPods in the mix, and $550 cans alone won’t do the job.
Perennial, not-very-seasonal performer is perennially performing. App Store, Watch-From-Home, Apple One combining iCloud, Music, Arcade, tv+, News+, and now Fitness+ into packages that often save family users money each month…
Apple Pay and Apple Card also chipping in, and AppleCare actually doing very well when various locales have allowed in-person shopping…
Momentum has always been there, and looks to remain there absent some major inflection point. Apple device installed base growth still happening? Check. Increasing Services engagement from Apple users over time, including some who may or may not have rented a movie or two or ten since…well…circumstances? Check.
If a $15B all-time record of a quarterly number isn’t achieved in FQ1 2021, it should be very soon.
Uncurbed Enthusiasm for FQ2 2021, Thanks Mostly to iPhone
Finally, a very quick look at FQ2 2021. Long story short, analysts are expecting iPhone 12 momentum to carry over to the first full shipping quarter in a big way.
How big? $74.5B overall revenues big, representing a whopping 28% YOY growth. It would be the highest-revenue March quarter for Apple by far, and would actually be very close to the sixth-best Apple quarter by revenue for all time. Just in case a $70B+ non-holiday quarter for a consumer tech-centric company didn’t sound bonkers enough right out of the gate.
Let’s just set a few parameters to better visualize how the consensus might be thinking here:
- Mac +15% YOY rev growth (to ~$6.2B)
- iPad +15% YOY (to ~$5B)
- W/H/A +12% YOY (to ~$7B)
- Services +15% YOY (to ~$15.3B)
Solve for iPhone, and it seems the Wall Street consensus may be expecting iPhone revenues to improve slightly over 40% YOY. Even if you assume one or more of the not-iPhone Apple business lines outperform my control baseline, it really doesn’t change the lofty consensus expectations for an incredibly strong iPhone quarter.
Will a soft compare from the prior March quarter, plus a running production start from the December quarter, help? Is $AAPL stock, with a trailing P/E of over 40 (remember when it was more like 10?!), now “dependent” upon meeting unsustainably high expectations? If nothing else, these storylines could be brief, hopefully welcome distractions from the pandemic.
Thanks as always for reading. Stay safe, stay well, and I’ll probably see you online on Wednesday for Apple’s biggest earnings release ever amidst these truly unprecedented times.