Gene is joined by independent Tesla analyst, Matt Joyce (Twitter @matty_mogul), to discuss the company’s latest quarter, 2021 delivery expectations, along with the timing and safety of full FSD.
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.
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.
March deliveries, earnings, gross margin and outlook all represent a step forward for Tesla.
The big picture is the shift to EVs, autonomy, and renewable energy will take longer than most think but in the end will be more transformative than most appreciate. We maintain the view that this reality will likely create near-term volatility in shares of Tesla. In the end, we continue to believe these segments will be the foundation of the future of transportation and energy consumption and will increase Tesla’s market cap over the long run.
The safety topic
The safety topic was addressed on the earnings call, with the company maintaining that while the recent Tesla crash was horrible, its vehicles are the safest on the road. Notably, commentary on the timing of full autonomy was absent from the call, with Musk saying it is a function of time. In our view, full autonomy will take longer than Musk had previously suggested (end of 2021) and ultimately be more transformative than we can imagine. Overall, autonomy remains a meaningful untapped opportunity for Tesla.
The March quarter
Tesla reported its seventh consecutive profitable quarter in March, driven by 109% vehicle delivery growth, versus the broader auto industry up 15%. Here are our takeaways from the March quarter report:
- Delivery guidance: The company reiterated its 50% average annual delivery growth rate over a “multi-year horizon” and expects deliveries to grow greater than 50% in 2021. The Street is around 70%, and we estimate 2021 delivery growth will be closer to 80%, driven by the Model Y ramp in Shanghai, the beginning of vehicle deliveries from Giga Berlin and Austin, as well as favorable 2020 comps. Tesla is experiencing accelerating delivery growth, the defining feature of a growth company:
- Auto gross margins were up sequentially in March to 22%, from 20.7% in December and 20% in March 2020.
- Free cash flow of $293m, down from $1.9B in December 2020 and $1B in December 2019. Cash flow was impacted by the company’s Bitcoin purchase and factory builds. Operating expenses increased in March quarter-on-quarter due to greater R&D spend for Model S & X Plaid production, investing more into new battery tech, along with neural net and custom silicon investments. We expect absolute levels of spending to continue to climb in the years to come, but decline as a percentage of revenue in 2022 as revenue grows faster.
- Cash on hand stands at $17.1B, down from $19.4B in December, largely due to a $1.2B net cash outflow from the Bitcoin purchase and capex increases. We continue to believe this represents sufficient cash to fund the company’s 50% compound delivery growth outlook for the next several years. Specifically, significant investments will be made in factory building, hiring manufacturing and engineering talent, and service center expansion.
- EPS of $0.93 was above analyst expectations of $0.78 and represents a step up from December at $0.80. Helping the beat was a step down in stock-based compensation to $614m in March, compared to $633m in December.
- Energy generation and storage grew 69% in March compared to 72% in December and -10% in March 2020. While the segment is still small (~5% of total revenue), long term we believe it has the potential to be 25% or more of the overall business. The challenge of growing this segment is that the auto segment is experiencing comparable growth rates; therefore, gaining as a percentage of revenue is difficult. Musk was notably optimistic about the segment on the earnings call, noting Tesla will become akin to a distributed utility company in the future, with homes capturing energy from the sun and feeding it to the grid. The demand for electricity in an all-electric future is staggering – Elon believes the world will need 3x more electricity for transportation and HVAC to undergo the electric transition.
- Services and other revenues were up 59% in March y/y compared to 17% in December and 14% in March 2020. This segment accounts for about 9% of overall revenue. Over time, as Tesla increases FSD availability, along with its ancillary offerings such as insurance, we believe this segment will account for a larger percentage of overall revenue, and, more importantly, help Tesla expand its margins closer to that of a tech company than an automaker.
- Tesla Semi deliveries are expected to begin in 2021, which will mark the company’s entrance into the commercial trucking market. Long, predictable highway miles are ideal conditions for full autonomy. We believe Tesla’s long-term vision for its trucking segment is to sell semis and eventually offer a high-margin logistics and dispatch layer that would compete with traditional logistics companies like C.H. Robinson. The biggest, recurring constraint on Semi production will be battery cell availability. Semis require 5x more cells than a car, and the company is already cell constrained.
We believe the following are the central topics to Tesla increasing its market cap:
Solar and storage
As mentioned, Musk referred to future Tesla as a giant, distributed utility, in which Tesla homes capture the sun’s energy, store it in a Powerwall, and feed excess energy to the grid. The company is focusing on streamlining solar installation to keep up with consumer demand, which continues to outpace Tesla’s install capacity. In a distributed utility future, Tesla homes will enjoy energy independence and stability in the event of grid outages.
Full Self-Driving (FSD)
There seemed to be an understandable pause in the company’s public commentary around FSD. As mentioned, Musk did not give a timetable for FSD, with his previous public commentary expecting this feature to be widely available by end of this year. Tesla may still believe in this end-of-year target but appears to be opting for a more conservative public posture on the topic. Our best guess is that widespread Tesla FSD is three to five years away.
Tesla reiterated that it expects initial deliveries for Tesla Semi by the end of 2021.
We continue to believe Tesla will launch a chaperoned robotaxi in 2021. We believe regulatory approval in the US will take a couple of years. Until then, we expect Tesla to ease consumers into the future with a chaperoned robotaxi fleet. The earliest versions of Tesla’s robotaxi service will likely require a driver to accommodate the regulatory environment (think of it as an Uber driver in a Model 3 running FSD). In this scenario, drivers will benefit from reduced stress and fatigue, and Tesla will benefit by starting to build a ridesharing brand by easing riders into the robotaxi age with a human behind the wheel. Eventually, AVs will be approved, and Tesla, along with its third-party operators, can turn on its autonomous fleet. In the near term, we don’t see this as a risk to Uber and Lyft, given the number of chaperoned vehicles in the Tesla fleet will not provide meaningful competition for the next couple of years.