Apple Earnings Preview: What To Expect of Macs
This is yet another article in the series “Apple earnings preview”. As usual, I will present my expectations for Apple’s third fiscal quarter by product or segment, starting with (1) a review of what happened in the second fiscal quarter and then moving to (2) what could go right and (3) what could go wrong in the most recent period.
Today, the topic of conversation are Macs. I have argued a few times that this product category is not one of the most relevant to the investment thesis, given the small segment size and slow growth profile. Yet, Macs could be a bright spot this time, maybe lifting sales when a bit of help is most needed.
What happened last quarter?
In fiscal second quarter 2020, Macs took a punch in the nose. The segment produced the worst growth rate of them all: -10%. Luckily for Apple, Mac is the smallest of the major hardware categories, so the damage was contained. See chart below.
Putting a damper on sales were probably a couple of key drivers. To start, the pandemic hit large markets like Greater China hard, and eventually moved into the Western half of the world. The combination of store closures and uncertainty regarding the economic impact of the health crisis probably led to decreased demand for PCs. Also, supply chains were disrupted in the quarter, which may have led to fewer transactions or, at least, delays in revenue recognition.
What could go right
- According to CEO Tim Cook, April sales started off soft but picked up the pace as the month progressed. He believes that Mac revenues “are going to improve on a year-over-year basis during this quarter, and that’s [due to] customers that are either taking online education or working remotely”.
- The first wave of stimulus payments from the US government started to arrive on April 13, according to the IRS. If consumers had been postponing purchases until their checks were received, late April should have seen a spike in spending.
- Apple released a new version of the 13-inch MacBook Pro in early May. Although the appeal of the new “middle child” model fell in between high-performance users and budget-conscious customers, the novelty effect may be enough to create increased demand for Macs in the period.
- Gartner has already reported on industry-wide PC sales in the second calendar quarter. Not only did the whole sector rebound from a tough start to 2020, Macs saw higher-than-average increase in unit shipment growth: 5.1% vs. the peer group’s 2.8%.
What could go wrong
- Apple stores began to shut down once again before the end of June. By early July, one-third of US locations were closed. While I think that the digital channel could very well pick up the slack, I also estimate that each 35,000 unit sales lost to the late-quarter closures (a relatively small number) would be enough to shave off one percentage point in Mac sales growth in fiscal third quarter.
- The much-awaited new iMac, whose release was speculated to happen at WWDC 2020, never saw the light of day. To be fair, I estimate that desktops account for only about 20% of Mac revenues. Still, Apple passed up on the opportunity to bring in extra dollars from a refreshed product late in the quarter.
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