Apple FQ1 22 – Good to be the king

Apple’s scale helps it to get the supply it needs.

• Apple reported good results as its scale and its excellence in supply chain management ensured that it was able to mitigate the impact of shortages and meet most of the strong demand that it had.
• FQ1 22 revenues / EPS were $124.0bn / $2.10 comfortably exceeding expectations of $118.4bn / $1.89 as the component headwind reduced sales by $6bn rather than the market expectation of $10bn.
• Apple used the commonality between the iPhone and the iPad and prioritised components for iPhone which was the main reason why the iPad had a weak quarter.
• As usual, the iPhone made most of the running growing by 9% YoY to $71.6bn with China and Asia making up for slower growth in other geographies.
• Services was another bright spot growing 19% YoY to $19.5bn with EBIT margins of 72%.
• It is important to remember that a large part of the services business is Apple Care (insurance) and that Apple’s profitability on its subscription services will be much lower or even loss-making.
• However, it has 785m users that pay it money every month which provides a very strong foundation for its digital ecosystem.
• To give Tim Cook credit, he has far outpaced my expectations from when he became CEO.
• He is not the visionary that Steve Jobs was, but he has absolutely leveraged the product that Steve Jobs created to the maximum.
• The Apple Watch, AirPods and the services that exist in orbit around the iPhone have grown into very large and profitable businesses and were all created on his watch.
• I am pretty sure that Steve Jobs would have never launched the Apple Watch and so I give full credit to Tim Cook for this product which again has beaten my bearish expectations for it into the dust.
• Consequently, the current horizon is clear as there are no threats on the immediate horizon to Apple’s dominance and the way looks clear for Apple to carry on dominating its segment and generating huge amounts of cash while it is doing so.
• However, the Metaverse is another matter entirely as vast amounts of money are being spent by Apple’s rivals to unseat its dominance in the digital ecosystem.
• If the Metaverse is to become as important as many hope, then the relevance of the smartphone will eventually wane and with it will go all of Apple’s legacy businesses.
• Apple has a big platform from which to make the pivot into the Metaverse and carry its dominance forward, but its requirement to protect its legacy businesses is going to make it far more difficult for it to succeed.
• Furthermore, this will require Apple to once again have a visionary management team as opposed to the execution powerhouse that currently runs the business.
• The Metaverse remains the biggest risk that Apple faces to its dominance of the digital ecosystem because I see Apple being currently where Nokia was in 2005.
• I am not saying that Apple will repeat Nokia’s mistakes, but there is a not-insignificant risk that it will given the pressures it will face to protect its legacy business.
• I remain pretty indifferent to Apple as it is not the most expensive of the tech giants, but it is very far from cheap.
• It will suffer in any sector rotation from growth to value but arguably less than some of the really high-value names like Tesla or Netflix.