Solid Q2 for Apple, but Looming Supply Constraints

Narrow-moat Apple AAPL reported fiscal second-quarter results that came in ahead of our estimates despite supply chain constraints and the ongoing chip shortage. Demand for the firm's latest iPhone 13 and MacBook Pro drove record iPhone and Mac revenue for the March quarter. We remain positive on Apple's ability to extract sales from its installed base via new products and services. However, management expects June quarter revenue to be $4 billion-$8 billion lower than usual because of supply constraints stemming from COVID-19-related disruptions, the ongoing chip shortage, softer customer demand in China, foreign exchange headwinds, and a pause in sales in Russia. Shares fell about 2% during after hours trading but remain above our unchanged fair value estimate of $130 per share. We believe the recent stretch of strong revenue growth will be difficult to maintain as COVID-19-related Mac and iPad demand subsides.

Second-quarter sales of $97.2 billion were up 9% year over year thanks to growth in iPhone (6%), Mac (15%), services (17%), and wearables, home, and accessories (12%). Apple’s iPhone sales grew 9% year over year to $50.6 billion. We were surprised by the magnitude of Mac sales growth, which we attribute to the launch of the Apple M1-powered MacBook Pro. Gross margins of 43.7% were down 10 basis points sequentially due to a seasonal loss of leverage and foreign exchange headwinds, partially offset by a more favorable mix. On the services front, we’re impressed that Apple now enjoys over 825 million paid subscribers (up from 785 million last quarter).

Management refrained from giving explicit revenue guidance for the June quarter due to macro uncertainty, but we expect low-single-digit year-over-year growth led by the services segment. The iPad segment remains the most supply-constrained, which we think makes sense as Apple is likely prioritizing its iPhone and Mac segments.

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