Apple Inc. (AAPL) has been on roll. The company is expected to post its biggest annual growth in profits and revenue in five years when it reports full-year results for fiscal year (FY) 2021, which ended in September. This is in spite of the massive economic disruption caused by the COVID-19 pandemic. But Apple may face tougher times ahead. Due to the global semiconductor crisis, Apple may decide to slash its production target by 10 million units for the new iPhone 13, its flagship product. In addition, an accelerating antitrust probe by the U.S. Department of Justice (DOJ) increases the odds that Apple may face an antitrust suit.
Investors are likely to look at how much these developments will affect Apple’s earnings and revenue growth when the company reports earnings after market on Oct. 28, 2021 for Q4 FY 2021. (Apple’s 2020 fiscal year ended in Sept. 26, 2020.) For Q4, analysts estimate that the company will report robust growth in adjusted earnings per share (EPS) and revenue on a year-over year (YOY) basis. But that growth is expected to be slower than the two most recent quarters.
Until now, Apple’s recent rapid growth has been driven in large part by skyrocketing demand for the company’s hardware and services as millions of people have worked, attended school, and participated in leisure activities increasingly from home during the pandemic.
Investors will also focus on another key metric: Apple’s services revenue. The iPhone maker has long been known for its hardware products, such as smartphones and computers. But it is aggressively expanding revenue by selling higher-margin, less seasonal services. The goal is to bolster profit growth and reduce dependence on hardware sales. Analysts estimate that services revenue will grow at a healthy pace in Q4, but slower than the most recent three sequential quarters.
Despite the company’s accelerating growth, the performance of Apple shares has been erratic over the past year. After trailing the market for much of November 2020, Apple stock broke ahead in December and again in January 2021. However, Apple then lagged behind the market for most of the period between February and August. Although Apple shares once again outperformed briefly in early September, the stock has largely underperformed since then. Over the past year, Apple shares have provided a 1-year trailing total return of 30.0%, slightly behind the S&P 500’s total return of 34.3%.
Source: TradingView.
Apple Earnings History
In recent years, Apple has been fairly consistent in generating gains in adjusted EPS YOY, although the size of the increases has varied widely. In the past 19 quarters, the company has reported YOY earnings declines only three times, the most recent being a modest drop in Q4 FY 2020. In Q1 and Q2 of FY 2021, Apple posted its fastest quarterly earnings growth in nearly five years. Now, analysts expect a slowdown in Q4 FY 2021, with Apple reporting a 65.0% YOY increase. While this is a slower pace than the last two quarters, it would be the third-fastest adjusted EPS growth since Q1 FY 2017.
Apple also has been less successful in generating consistent revenue growth. During the past 19 quarters, the company reported two periods of declining revenue and another six quarters during which revenue growth was less than 5%. In four of those cases, revenue rose less than 2%, including in Q4 2020. But Apple’s revenue took off in FY 2021, rising by 53.6% YOY growth in Q2 and 34.4% in Q3. For Q4 2021, analysts expect revenue to grow at a slightly slower pace in Q3, by 30.2% YOY. But that still would also be the third-fastest revenue gain in five years.
| Apple Key Stats | |||
|---|---|---|---|
| Estimate for Q4 FY 2021 | Q4 FY 2020 | Q4 FY 2019 | |
| Adjusted Earnings Per Share | $1.21 | $0.73 | $0.76 |
| Revenue (B) | $84.2 | $64.7 | $64.0 |
| Services Revenue (B) | $17.6 | $14.5 | $12.5 |
Source: Visible Alpha
The Key Metric
As mentioned, a key metric investors will focus on is Apple’s services revenue. Its services include the company’s digital content stores and streaming services, such as its various App Store platforms, Apple Music, Apple Arcade, Apple News+, and Apple TV+. Apple also generates services revenue from AppleCare, advertising services, cloud services, and other services, including Apple Card and Apple Pay. The company first began to focus on its services business in 2015, when growth in iPhone sales started to slow. Profit margins on services sales are dramatically larger than on Apple’s hardware profits. That means that each dollar of added service sales disproportionately boosts Apple’s profits compared to hardware sales.
In the past 19 quarters, Apple has posted healthy services revenue growth. It’s ranged between 12.6% and 40.0%, and typically toward the higher end of this range. Growth accelerated in FY 2021 compared to the previous two years. Revenue rose 24.0%, 26.6%, and 32.9% YOY for Q1, Q2, and Q3, respectively. For Q4 FY 2021, Analysts expect services revenue to increase 20.7% YOY. That’s markedly faster than the same quarter a year ago, but it also would represent a deceleration compared to the first three quarters of FY 2021. .
