Big Tech: blowout earnings are sustainable
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Big Tech’s ascension is in full flow. Between them, Apple, Microsoft and Alphabet reported close to $190bn in revenues and $57bn in profit in the past quarter, billions of dollars more than forecast. Yet while Microsoft and Alphabet shares rose in after-hours trading, Apple’s fell. The dip is unnecessarily negative.
“Progress made is not progress guaranteed,” warned Apple boss Tim Cook. Fair enough. But the trends that led Apple to double net income to $21.7bn in the last quarter are long term. The company was forced to close physical stores during the pandemic and delayed the release of its latest smartphone model, the 5G-enabled iPhone 12. It is still facing supply chain problems. Yet demand has not flagged.
The hype around next-generation 5G connection speeds has failed to set the world alight. Luckily for Apple, millions of iPhone users held off upgrading their handset for years and are making the switch anyway. iPhone sales rose 50 per cent to slightly less than $40bn in the April-June quarter. According to data analytics group Kantar, two-thirds of people planning to buy a new smartphone are looking for a 5G model and want to stick with brands they know. That bodes well for the upcoming iPhone 13.
Apple has long been criticised for failing to release new iPhone iterations with truly innovative features. Yet its dual strategy of selling expensive new versions of hardware while offering high margin services to users is working. The pandemic reopening has not been a return to normality. Remote work, education and entertainment remain popular. Look at iPad sales, up 16 per cent on the same period last year and the highest June quarter by revenue in almost a decade.
Go back five years and Apple was in a trickier position. Unit sales growth was uncertain as smartphone competitors fought for market share. Shares traded at 13 times expected earnings — less than half the multiple at which they trade today. The company’s success lay in its ability to keep users in its ecosystem and retain a luxury brand. Both hold true. Even criticism of the App Store by regulators and rivals has not inflicted serious damage to these two selling points.
Apple has made it clear that growth in the current quarter will not be as strong, largely owing to chip shortages. These circumstances are temporary. There are more records to break.
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