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Supply Constraints Ding Apple

A shortage of the larger iPhone 7 Plus is the biggest driver behind Apple’s disappointing holiday-quarter guidance, says Morningstar’s Brian Colello.


Brian Colello: Apple reported solid fourth-quarter results this evening. IPhone sales were a little bit ahead of expectations. Revenue was about in line with expectations. They also beat on the EPS line. So, really, a solid fourth quarter from Apple.

The bigger news is always the first-quarter forecast for the December quarter and the holiday season. And there the big story is that the iPhone 7 Plus is a bit supply-constrained, that demand is outstripping supply, and they are not going to be able to satisfy all orders. And so, the revenue guidance for Q1 was $76 billion to $78 billion. That's a little bit higher than what it was a year ago, so only slight growth, which is a little bit of a disappointment. We've seen the stock down about 3% after hours on that news.

The bigger disappointment we think for Q1 coming up is the gross margin guidance, which is about 38%. They reached as high as 40% and even if you adjust it back, kind of 39% is the baseline. And again, I think that's the issue that they are going to sell fewer iPhone 7 Pluses which are the higher-priced phones, have the better margins, because there is more storage attached to they, they get that pricing increase on the large phones. So, really, the supply constraints there are causing issues or weak guidance, I suppose, across the entire chain. So, revenue growth not as high as maybe what some investors were expecting, gross margins looking a little weaker, profitability looking a little weaker than what we were expecting, and I think you can attribute it all to the iPhone 7 Plus.

The good news or the silver lining, if any, on the 7 Plus is that that might bode well for the March quarter and a little bit of a bounce back. March was especially weak a year ago, so you might get some favorable comps and a little bit better quarter looking ahead. But again, I think looking at Q1, we do see some weakness based on the iPhone 7 Plus.

Ultimately, we are not expecting tremendous growth from Apple. So, even the Q1 forecast, we're not expecting exponential growth anymore for this company. They are hitting all of the major carriers. They have expanded into all of the regions. But we expect sales to be somewhat resilient longer term and we still see that going on with Apple. So, we are still bullish on the company long term. But again, the Q1 forecast, particularly on the gross margin line, just a little weaker than what we were thinking.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.