Apple March Quarter Preview

Apple March Quarter Preview

Apple will report March quarter results on Wednesday, April 28th. We expect fractional upside to March consensus revenue growth estimates of 31% y/y. The numbers will continue to have noise for three reasons: favorable comps, some iPhone demand was not met in the December quarter and fell into the March quarter, and stimulus checks, which we expect will inflate revenue growth, and that the results will continue to instill confidence that the company will grow revenue around 21% in FY21, compared to 6% in FY20. The accelerating digital transformation will likely continue to be a tailwind for Apple’s revenue growth for the next several years.

Marching forward

We believe the March quarter results will be a step toward our prediction that Apple will be the top-performing FAANG stock this year, based on three factors:

  • The accelerating digital transformation means more people are working and learning from home, providing a continued tailwind for the iPad and Mac businesses (about 25% of total revenue). We believe these two segments can grow at 10% plus in 2021 and 2022, compared to flat growth over the last few years. If correct, that would be in line with consensus estimates for this year, and about 10% ahead of the Street for next year.
  • 5G enthusiasm will grow in the back half of the year, starting a two to three-year iPhone upgrade cycle.
  • Growing anticipation of new business segments that could be announced this year and likely won’t launch until 2022 at the earliest. We expect this summer the company will preview its mixed reality goggles and, over the next couple of years, offer hardware subscription offerings that build toward a 360° bundle, along with eventually addressing the massive opportunity around autonomy with Apple Car.

How to think about the stock: The case for $200

Putting it together, we believe shares of AAPL will approach $200 (48% upside from current levels) over the next several years, based on 35x our 2022 EPS estimate of $5.70.

Key March metrics:

  • Cash: Apple ended the December quarter with $196B in total cash including $112B in debt, or $84B in net cash. We expect total cash at the end of March to be $190B, including $112B in debt, or $78B in net cash. The topic of Apple’s cash position is more complex than its cash balance. Apple has outlined a goal to be net cash neutral over time, suggesting that total cash will eventually equal debt.  This is good news for investors—they can expect an additional estimated $84B in cash will be returned through buybacks and dividends or otherwise strategically deployed. Some of that cash has already been committed to investors through the company’s capital return program. The challenge is that the company is generating so much net income that the road to net cash neutral is long and slow. Apple has generated $57.4B in net income over the past four quarters and returned $90.2B in capital during a tumultuous year. At this pace, it will take the company two to three years to be net cash neutral. In the end, Apple has a good problem when it comes to cash—a gravy train of cash returning to investors, which is not fully appreciated.
  • Update to capital return goals. We expect Apple to increase the total capital return program by $75B. This is a step up from last year’s $50B increase. We expect this increase because the company is making slow progress on its long-term goal of being net cash neutral and believe it will require a more aggressive cash return approach to meet that objective over the next three years.
  • Revenue: We expect fractional upside to consensus revenue estimates of $77B (up 31% y/y). Some analysts’ expectations have drifted above $80B. Keep in mind that in March of 2020, we estimated Apple’s revenue was growing at 12% for the first seven weeks of the quarter and was down 17% for the final five weeks.
  • Earnings: We expect EPS of $0.99 (up 55% y/y), in line with the Street.
  • Guidance: When the company reported March 2020 quarter results, they stopped providing guidance. We don’t expect guidance for the June 2021 quarter.
  • iPhone: (54% of sales) March iPhone results will see a small benefit from the timing of the latest iPhone release, along with the easy comparison from last year. Putting those together, we expect 41% y/y growth to $41.2B, which is in line with the Street.
  • Services: We expect Services (20% of sales) to be up 16% y/y to $15.5B, compared to 24% y/y growth in the December quarter. Some analyst expectations are calling for 20% growth. The Services segment does not benefit from an easy year-over-year comparison given demand for Services was steady during 2020. Looking forward, we expect Services growth will dip in the upcoming December quarter given the recent difficult comp. Long-term, we expect growth to remain consistent around 15% as Apple continues to layer on more Services, including more recently Apple Fitness+, along with its upcoming podcast marketplace.
  • Wearables: Apple does not report this metric, and Loup estimates the segment. We expect wearables (8% of sales) to be up 23% y/y, compared to up 35% last quarter. We believe this segment has lagged, given Apple Watch is viewed by consumers as non-essential compared to iPhone, Mac, and iPad. Adding to the Watch sales headwind has been limited capacity at Apple Stores, where many first-time Watch buyers shop. Apple does not report this metric but frequently comments on the segment’s sales trajectory. Apple TV, Home, and Accessories add an additional 2% to overall revenue with mid-single-digit revenue growth.
  • Mac: We are modeling for Mac revenue (9% of sales) to be up 23% y/y to $6.6B. We believe the Street is expecting similar growth. Based on IDC industry data released earlier in the month, we believe there is upside potential for the Mac. The refreshed Mac lineup with the new M1 chip, along with the work and learn from anywhere trend has boosted the segment’s sales.
  • iPad: We expect iPad revenue (7% of sales) to be up 30% y/y to $8.4B. We believe the Street is expecting 30% growth. This is a step down in growth from 41% in December, and we see room for upside in June when we are expecting the segment to be down 6% y/y, in line with consensus.

A thought on China

Last quarter China surprised to the upside, reporting growth of 57%. We believe that was driven by two factors: Chinese consumers have been holding onto their iPhones longer and are entering their upgrade period, and second, 5G is particularly important for Chinese buyers, which iPhone 12 has addressed. While we don’t expect that kind of growth again in March, we believe growth in China will outpace the company’s overall growth. 

Thoughts on the Epic trial

May 3rd marks the start of the Apple v. Epic bench trial, with a decision likely coming in early June. At stake is the App Store take rate, which is consistent with the broader industry’s two-sided marketplace take rates. Given iOS represents a large share of app store dollar values, Epic argues that the 30% rate is egregious. At Loup, we are split on how the decision will play out, with two of the partners expecting a win for Apple and one expecting it to be in favor of Epic.

The chip shortage

Most tech hardware companies are reporting difficulties in procuring components in the March quarter given global chip shortages. It’s likely Apple had some of these shortages during the quarter as well, which we believe only modestly impacted supply. We expect these issues to be worked out by the end of the June quarter.