Apple reports quarterly sales miss amid supply constraints. Should investors be concerned?

Apple’s (NASDAQ: AAPL) stock price recently dipped after the tech giant posted a mixed fourth-quarter report. 

Its revenue rose 29% year over year to $83.4 billion from $64.7 billion, while analysts were looking for $85.1 billion. Meanwhile, earnings rose 70% from $12.7 billion or 73 cents a share, to $20.6 billion or $1.24 per share, and matched analysts’ expectations.

Apple attributed its slower-than-expected growth to supply chain constraints. “Demand was very robust,” CEO Tim Cook said on its earnings call, but he estimated that supply constraints had a $6 billion negative impact on revenue, citing “industry-wide silicon shortages and Covid-related manufacturing disruptions.” 

The company expects those constraints to have an even bigger impact on its first quarter sales, CFO Luca Maestri said, although Apple still anticipates that it will set a revenue record during the quarter. 

With the challenges in mind, should investors be concerned about Apple’s growth prospects? We delve into Apple’s latest earnings to find out more.  

All business segments continue to generated sales growth

Apple’s core businesses of iPhone, Mac and iPad businesses all faced supply chain bottlenecks during the quarter, but all three segments grew year over year. The company is currently in the middle of massive growth as sales of iPhones, iPads and Macs exploded during the pandemic. 

Segment	Q4 2021 Revenue	Q4 2020 Revenue	Growth (YOY)
iPhone	$38.87 billion	$26.44 billion	47%
Mac	$9.18 billion	$9.03 billion	2%
iPad	$8.25 billion	$6.80 billion	21%
Wearables, Home and Accessories	$8.79 billion	$7.88 billion	12%
Services	$18.28 billion	$14.55 billion	26%
Total	$83.36 billion	$64.70 billion	29%

(Source: Apple, YOY = Year Over Year)

The strongest growth in Apple product categories aside from iPhones was in its services business, which includes sales from the App Store, music and video subscription services, advertising, extended warranties, and licensing.  

Apple ended the year with 745 million paid subscribers, which not only includes first-party services like Apple Music but also subscriptions through Apple’s App Store. That figure is up 160 million year on year, and up nearly 5 times from 5 years earlier.  

Such explosive growth in the services category should widen Apple’s moat, increase the stickiness of its digital ecosystem, and reinforce the brand loyalty that supports its pricing power in the hardware market. 

It is also the reason why Apple’s gross and operating margins have expanded significantly in both the fourth quarter and the full year, even as the broader smartphone, tablet, and PC markets were commoditised by cheaper devices. 

Period	Q4 2020	Q4 2021	FY 2020	FY 2021
Gross Margin	38.2%	42.2%	38.2%	41.8%
Operating Margin	22.8%	28.5%	24.1%	29.8%

(Source: Apple)

Apple’s expanding operating margins indicate it still has plenty of bargaining power in managing its suppliers. It also doesn’t need to rely too heavily on pricey marketing campaigns to generate stable sales growth.

Furthermore, Apple continued to generate double-digit revenue growth across all five of its main geographic regions during the fourth quarter.  

Region	Q4 2021 Revenue	Q4 2020 Revenue	Growth (YOY)
Americas	$36.82 billion	$30.70 billion	20%
Europe	$20.79 billion	$16.90 billion	23%
Greater China	$14.56 billion	$7.95 billion	83%
Japan	$5.99 billion	$5.02 billion	19%
Rest of Asia Pacific	$5.19 billion	$4.13 billion	26%

(Source: Apple, YOY = Year Over Year)

Apple’s massive growth in the Greater China region, which marked an acceleration from its 58% growth in the third quarter, should silence the bearish claims that it will be unable to compete effectively with Chinese competitors like Xiaomi, Oppo, Vivo and Huawei. 

In fact, Apple’s share of the Chinese smartphone market actually expanded from 8% to 13% between the third quarters of 2020 and 2021, according to Counterpoint Research, even as critics fretted over potential boycotts related to geopolitical tensions such as the trade war and the tech war. 

Returning plenty of cash to investors

Apple’s near-term revenue growth might be curbed by chip shortages and other supply chain challenges, but it continues to return a large portion of its free cash flow to shareholders with big buybacks and dividends. 

In April 2021, the company announced an increase to its current share repurchase program authorisation from $225 billion to $315 billion and raised its quarterly dividend from $0.205 to $0.22 per share beginning in May 2021. For the full year 2021, the company repurchased $85.5 billion of its common stock and paid dividend and dividend equivalents of $14.5 billion. 

Apple ended the year with $172.6 billion in cash, cash equivalent and unrestricted marketable securities. This compares favourably against its short and long-term debt obligations of $124.1 billion, as the company continues to make progress towards its goal of reaching a net cash neutral position over time. 

Apple’s healthy financial position also leaves the company plenty of room for future investments or acquisitions as it continues to expand its services ecosystem and enter new markets like augmented reality devices and connected cars.

Don’t miss the big picture

Despite the uncertainties, investors shouldn’t worry too much about the near-term chip shortages and supply chain constraints that may hamper Apple’s hardware iPhone and other hardware production. This is because the company has a lot of room for growth in the 5G smartphone era thanks to its huge base of users. 

Earlier this year, Apple CEO Time Cook reported that the company had an installed base of more than 1 billion active iPhone users. The company launched its first 5G-enabled iPhone models just last year, which means that only a small fraction of its installed base is using 5G devices. The iPhone 12 (Apple’s first 5G device) clocked 100 million shipments in April this year, indicating that there are still plenty of users still in an upgrade window. 

Therefore, Apple should continue to witness a solid increase in shipments over the coming years as 5G adoption increases. In fact, Strategy Analytics estimates that Apple’s share of the 5G smartphone market could increase to 40% with the launch of the iPhone 13, compared to 29%. All this shows that Apple’s growth momentum is here to stay.

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