It’s been an extraordinary time for Apple (NASDAQ: AAPL), which set a new third quarter revenue record in 2021. While the pandemic plunged most of the world into chaos, the tech giant has come on leaps and bounds.
The continuing popularity of its first 5G phone, as well as high demand for laptops as people continued to work from home, led to an exceptional quarter for the company.
Revenue jumped 36% to $81.4 billion, putting the firm miles ahead of consensus estimates. Refinitiv data showed consensus for revenue of $73.3 billion, meaning the real revenue figure was 11% ahead of estimates.
However, in Apple’s Q3 earnings call, chief executive Tim Cook did not shy away from the challenges ahead, saying:
“An uneven recovery to the pandemic and a Delta variant surging in many countries around the world have shown us once again that the road to recovery will be a winding one.”
Taking into account the challenges ahead, as well as the company’s success so far, can help build a clearer picture.
5G or not 5G – iPhone 12 helps boost Apple performance
Products delivered 37% revenue growth to $63.9 billion with double-digit growth for the iPhone in all geographic segments, with customers still flocking to the iPhone 12 – Apple’s first 5G-enabled smartphone lineup.
Services, meanwhile, hit $17.5 billion – a 25% rise and a new all-time record for the company.
Cook noted that “customers love iPhone 12 for its superfast 5G speeds”, among other features, with the technology taking off of late as this technology really comes into its own.
5G, the next step up from 4G, is the fifth generation when it comes to wireless data networks and the new global standard in wireless communication. Major players like Verizon, AT&T, and T-Mobile are all building up their 5G networks right now.
Many of us remember the step up in speed between 3G and 4G. And 5G marks yet another boost in speed, potentially up to 100 times as fast as 4G. To take advantage of this super high-speed internet requires a technology upgrade to 5G-enabled devices like the iPhone 12.
This represents a growing market. And, as Cook said, Apple is “at the front end” when it comes to 5G, which continues to roll out across the US and other countries.
Revenue growth set to slow in final quarter
The consensus estimate for Q4 revenue is $84.6 billion, which would equate to a 30% increase year-on-year from $64.7 billion. This is in keeping with Apple’s own expectations.
Luca Maestri, the company’s chief financial officer, pointed out in the earnings call that there would be no Q4 revenue guidance (the company having declined to give such guidance for the previous five quarters as well, due to Covid-19). However, he did offer some insights.
Provided the virus’ impact on the firm does not worsen from current projects, Apple expects to deliver “very strong double-digit year-over-year revenue growth” for the quarter ahead, according to Maestri. However, the increase will likely not exceed the 36% growth seen in Q3.
The company provided three reasons for this projected slowdown in revenue growth.
Foreign exchange – Apple predicts that the impact of foreign exchange on the year-on-year growth rate will be “three points less favourable” compared to Q3, Maestri said.
Comparison – This year’s Q3 services growth rate got a major boost from its comparison to the more turbulent prior year. This was due to lockdowns in the third quarter of 2020. Going into Q4, Maestri said the services growth rate is set to “return to a more typical level”.
Supply constraints – The firm expects greater supply constrains in the fourth quarter ahead versus the third, mostly impacting the iPhone and iPad. During the Q3 call, Cook said he would classify the constraints as “industry shortage”. He also highlighted that with demand “so great and so beyond our own expectation” it has been hard to obtain parts within lead times.
Apple share price hits a new record
Apple shares hit a brand-new record high in late August, a month after posting such excellent results. Since the July 27 announcement, shares are up more than 3% and have climbed 17% year-to-date.
The pandemic pushed investors towards so-called FAANG stocks. FAANG is an acronym for Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple, Netflix (NASDAQ: NFLX) and Google, now Alphabet (NASDAQ: GOOGL, NASDAQ: GOOG).
These big tech stocks have held major appeal during a time of great uncertainty, as the worldwide Covid-19 pandemic closed businesses and disrupted supply chains.
Shares in Apple are up more than 100% since the start of 2020. Likewise, Facebook and Amazon have both seen stocks climb by over 80% in the same period.
Working from home – a lasting trend?
The increase in remote working has been a major boost for Apple, with people needing to purchase laptops and other devices for their home offices.
Indeed, the firm’s own corporate employees are yet to return to their desks.
The rise of the highly contagious Covid-19 Delta variant had pushed back a return to office work at Apple from the initially planned September to January 2022. Some had already objected to the September return date. In fact, 80 employees wrote an open letter to Cook expressing their displeasure with the policy.
Other companies have made similar decisions. Amazon’s own corporate employees are now set to return in January 2022 as well, having also originally planned to be back in September.
Previously, Cook said that employees would be expected in the office for a minimum of three days per week once they do return.
This more flexible pattern has been popular among many companies. Amazon, for example, also plans to have corporate employees come in to the office three days a week.
Facebook has said employees who are able to work remotely can request to continue even after the pandemic is over.
A poll on behalf of Bloomberg News found that close to 40% of respondents would consider leaving their jobs if they couldn’t work from home.
While Apple is facing its own struggle in this area, there’s definitely a larger opportunity here.
If the remote working trend continues, and it looks as though it might, this could lead to a permanent expansion of the market.
What next?
With a $2.5 trillion market cap, Apple remains the largest company in the world. But does it really justify such a high valuation?
With 5G continuing to roll out and remote working continuing, the investment case is far from weak.
But, of course, there are other factors to consider. Slowing revenue growth and supply constraints are hard to fully set aside. Plus, 5G is still in its infancy at this point.
Given we’re only 18 months or so into the pandemic, it’s anyone’s guess whether employees will be allowed to keep working from home indefinitely.
And the course of the pandemic is its own unknown.
Whether or not Apple is a good investment depends on how you think the pandemic will play out from here.