Apple is strong, sticky, expect strong FY Q2 – analyst

Morgan Stanley’s Katy Huberty has published an upbeat prediction for Apple’s next quarter, calling 8% growth year-on-year, partly – but not entirely – through iPhone SE 5G. She’s raised her target on the stock to $210.

Apple is strong and sticky

Looking at Apple’s just announced quarter, she notes how this has stressed the “strength, and stickiness” of Apple’s ecosystem of 1.1B iPhones, which is a clear differentiator in a challenging market environment.

“Apple’s December quarter was one of the cleanest quarters in recent memory as revenue, gross margin, and EPS all beat our above consensus forecast, with Mac and Services growth particularly strong.

“When coupled with a stronger than anticipated March quarter guide despite difficult Y/Y comps and continued (but easing) supply constraints, tonight’s results illustrate the strength and stability of Apple’s product and services ecosystem, a clear differentiator in a more difficult market environment,” the analyst said.

Huberty thinks the average Apple user contributed just $69 to Apple Services revenue and spent just $280 on Apple hardware in 2021 – and she thinks Apple can push that higher.

Why?

Because its users are highly engaged, very loyal, and that the company’s predicted $91 billion R&D spend across the next three years means it has plenty of ideas with which to tempt its audience to invest more in its services and in its hardware.

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Apple has plenty in the pipeline

Huberty points to Apple’s R&D investments, predicting 17% CAGR over the next three years in support of a growing product and services pipeline ahead.

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This gives Apple room to grow on both hardware and services, particularly around per user spend. In the meantime, Apple’s gross margins were “also the strongest since March 2012,” she said.

So, what to expect?

She thinks the coming quarter will see -24% sequential growth in the March quarter, above pre-COVID seasonality of -31%. In other words, the next quarter will remain strong, and that’s despite component shortages with iPhone SE 3 helping to drive the charge. (Though I think Apple may have a little extra planned).

“Taking all of this into account, we now forecast FY22 revenue growth of 8% Y/Y, up from 6% Y/Y previously,” she says.

Additional notes

• Record Services gross margins of 72.4%
• Product gross margins of 38.4% (highest since December 2015)
• The strongest quarterly gross margin since March 2012.
• Logistics and component costs continue to weigh down margins, but this may be improving.
• In CY21, Apple’s total active device installed base grew 9% Y/Y, to ~1.8B.
• iPhone installed base grew an estimated 9% Y/Y, to ~1.1B.

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