Apple warns growth will slow after record sales

(Bloomberg) — Apple Inc. fell as much as 2.9% in late trading after warning that revenue growth could slow and inventories become tight, dampening investor excitement after a record-breaking third quarter.

The company said during a conference call on Tuesday that delivery restrictions will affect the iPhone and iPad in the current quarter. Decreasing demand for services will also lead to delays. Apple declined to provide specific revenue forecasts, a practice it has practiced during the pandemic.

The cautious comments followed a 36% increase in revenue in the third quarter, with revenue of $81.4 billion shattering Wall Street’s estimate of $73.8 billion. But investors are sticking to a wait-and-see attitude. Parts shortages and a patchwork of Covid restrictions will continue to weigh on Apple’s business this year.

The Cupertino, California-based company’s lack of specific guidance for the fourth quarter continued a trend that began when Covid-19 first hit in 2020. And Apple isn’t unique. Many companies have curtailed their outlook in the face of pandemic uncertainties.

For now, business is thriving. The iPhone, Apple’s core product, grew about 50% in the quarter to $39.6 billion, better than forecasts of $34.6 billion. Q3 is typically one of Apple’s slowest periods — with consumers waiting for new phones to launch around September — but the 5G iPhone 12 appears to have helped the company break that trend.

And the company still expects “strong” double-digit growth in the fourth quarter.

“Our record June quarter results include new revenue records in each of our geographic segments,” Chief Financial Officer Luca Maestri said in a statement. Apple continues to make significant investments to support long-term growth, generating $21 billion in operating cash flow and returning $29 billion to shareholders in the third quarter, he added.

Delivery Restrictions

Apple reported $7.37 billion, or 12% growth, in revenue for the iPad, beating expectations of $7.13 billion. Apple debuted new iPad Pro models in April, but the line was limited due to issues building new screens for the larger models. For the Mac, Apple reported revenue of $8.24 billion, or growth of 16%, ahead of its estimate of $8 billion.

Apple previously warned that third-quarter revenue would hit from $3 billion to $4 billion due to the chip shortage affecting some iPad and Mac components. Third quarter earnings were $1.30 per share, compared to an estimate of $1.01 per share.

Service revenues reached $17.5 billion, ahead of the estimate of $16.3 billion and a third higher than the same period last year. That company relies heavily on sales of in-app purchases and third-party app downloads, and Apple recently cut the discount for most apps from 30% to 15%. The company has launched a slew of new services in recent years, including Apple TV+ and Apple Arcade, but hasn’t said how they perform.

Apple Watches

Apple also saw its wearables, home and accessories segment grow 36% to $8.78 billion. That category includes the Apple Watch, AirPods, Apple TV, the HomePod, and several other accessories. Apple hasn’t updated its AirPods earbuds since 2019, last year’s Apple Watch upgrades were minor, and this year’s Apple TV updates focused on a faster processor and a redesigned remote.

All of Apple’s stores reopened in June, and the company has also started a hybrid program to help staff work from home or stores with more flexibility.

As economies continue to reopen due to vaccines, the demand for Apple devices has generally increased. However, with Covid cases rising again and the chip shortage continuing, the challenges are expected to continue through the holiday season.

Delays in returning to work

The rise of the Covid Delta variant has already led Apple to roll back a return mandate for office workers by at least a month, and has reinstated masking rules in stores.

Even with the muted response to the results, Wedbush Securities analyst Dan Ives said they should help lay the groundwork for Apple to reach a $3 trillion market cap by the next year. The stock is up 11% so far this year, giving it a valuation of about $2.5 trillion.

“We would characterize this as a ‘gold medal’ performance from Apple during the quarter, especially given the chip shortage,” he said.

(Updates share comment from the first paragraph.)

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