Apple Inc - Record quarter

31 Jan 2022
  • 1Q22 revenue and PATMI was 32% and 38% of our FY22e forecasts.
  • iPhone shipments and average selling prices (ASP) exceeded expectations, despite the supply chain constraints. Record gross margins for both product and services segments.
  • Maintain BUY with a higher target price of US$214.00. Valuations based on DCF with a WACC of 5.8% and terminal growth of 3.0%. We raise our FY22e PATMI by 9% to reflect higher revenue from increased iPhone shipments as the supply chain eases, as well as higher gross margins from stronger ASPs and growth in Apple’s higher margin services segment.

The Positives

+ iPhone beat on volume and prices. According to IDC, iPhone shipments of 85mn exceeded market expectations of 82mn for 1Q22. Apple outmaneuvered the supply chain constraints. Customers are also purchasing higher-end models, with ASPs at US$844 vs consensus of US$833, and our FY21e forecast of US$835. Demand was across all geographies, especially in China, which contributed a five-year high of 21% of Apple’s revenue for the quarter. Alongside the 5G iPhone 13’s appeal, Apple’s smartphone market share in China has benefited from US sanctions against Chinese rival Huawei preventing them from securing parts for their smartphones.

+ Record gross margins. 1Q22 gross margin of 44% exceeded our FY22e expectations of 41% despite elevated transport and component costs. Apple’s Services segment comprising Apple Care, iCloud and the App Store enjoyed record margins of 72% while beating consensus revenue growth estimates, (24% vs 19%) driven by Apple’s installed base of 1.8bn, up 20% YoY. The Products segment also provided record margins of 38% driven by higher ASPs from sales of more expensive iPhone and Mac models.

The Negatives

– iPad impacted by chip shortages. iPad was impacted the most by chip shortages. iPad revenues declined 14% YoY to US$7bn, affected by shortages on trailing nodes. Demand, however, remained healthy with half of iPad purchases made by first-time users. iPad contribution to 1Q22 revenue is only 6%.

Outlook

Despite tough comparables of 54% revenue growth last year and a roughly 7% headwind from FX and supply constraints, Apple guided record revenue for the March quarter. The Services segment is expected to continue growing at double digits, driven by the higher installed base. This will help keep gross margins elevated between 42.5% and 43.5%. Apple also guided supply constraints to ease on a sequential basis.

Maintain BUY and higher TP of US$214.00

Valuations based on DCF with a WACC of 5.8% and terminal growth of 3.0%. We raise our FY22e PATMI by 9% to reflect higher revenue from increased iPhone shipments as the supply chain eases, as well as higher gross margins from stronger ASPs and growth in Apple’s higher margin Services segment.

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