Apple (NASDAQ:AAPL) stock has been under pressure since the end July 2022 when research companies started publishing disappointing Q2 smartphone shipments and when Micron (MU) presented dire guidance on memory sales following a slowdown in consumer electronics products like smartphone and PCs.

In this article, I present my thesis that suggests Apple’s flagship smartphone sales will be better than anticipated by a deep dive into 1H2022 results, as will its other products, in light of Apple’s lack of empirical guidance for F4Q.

Apple’s September 7 Event – Earlier Than Usual A Positive With No Supply Chain Problems

Apple recently sent out invitations to its “Far Out” event slated to be held at the Steve Jobs Theater in Cupertino, California on Sept. 7. As seen in Table 1, all iPhone events since the iPhone 4S in 2011 were introduced later than the Sept. 7, 2022, date of the iPhone 14 event.

This suggests that Apple’s supply chain is under control and can deliver on time. In previous years, several iPhones were introduced later than planned, primarily due to supply chain issues. The iPhone 12 was delayed because of 5G parts shortages.

Last year’s iPhone 13 production ultimately fell 20% short of the initial plan in September and October. The root cause of delays revolved around the need for a supplier ramp of sensor-shift optical image stabilization to all four iPhone 13 models when Apple had only used sensor-shift stabilization on the iPhone 12 Pro Max, while the other models relied on OIS (optical image stabilization).

Even with the iPhone 14 development, there have been glitches in the camera coating. Rear cameras that Taiwan’s Genius Electronic Optical Co. supplied experienced coating-crack quality issues. As a result, Apple had to move 10 million lens orders to Largan Precision to prevent iPhone 14 shipment delays.

Smartphone Shipments May Be Down, But Apple is Up – A Positive

Much of the negative news surrounding the consumer electronics market is a headline that’s not well thought out. Indeed, smartphone shipments decreased on a YoY basis, but Apple shipments increased.

Research firm Counterpoint Research said that Apple saw 147% year-over-year growth in the $1,000 and above portion of the smartphone market, accounting for 46% of the total market.

On a global basis, overall smartphone shipments fell -7% YoY to 291 million units in Q2 2022. But Apple shipped 48 million iPhones worldwide, up +3% YoY, for 16% global market share in Q2 2022, as shown in Chart 1. This is the highest second quarter market share for Apple over the past 10 years, at the expense of leading Chinese brands who were hampered by the sluggish performance in both home and overseas market. Apple had a good quarter, led by iPhone 13 series which continued to ramp up volumes in US, China and other key markets, according to the company.

Chart 1

Will Dour Economy Influence iPhone 14 Sales?

Macroeconomic headwinds have been a challenge for investors, particularly inflation. In the past month since Apple’s F3Q earnings call, these headwinds have abated somewhat. But the reasoning for moving up the Apple event Sept. 7 has raised speculation that it was done in light of the economic malaise impacting consumers prior to further negative news.

I see the move as an opportunity for Apple to jump start its supply chain economically since its delivery schedule appears to be stable with no glitches. This strategy will financially help suppliers of components as concerns of layoffs and redundancies are on the horizon. It’s also geared to app developers, many of which are small businesses.

In the past two weeks on the positive economic side:

• Consumer confidence reached 103.2 in August, an increase of 7.9 from the final reading of 95.3 for July.
• Producer prices fell 0.5% in July from the month before.
• Home prices jumped to a record high in the second quarter
• U.S. consumer sentiment rose in early August to 55.1, continuing its climb from a record low earlier this summer as inflation expectations improved.
• U.S. retail spending held steady in July, and excluding autos and gasoline, spending rose 0.7%.
• Initial jobless claims inched down to a seasonally adjusted 250,000 last week, a sign the labor market is holding up.
• Employers in the U.S. added about 462,000 more jobs in the year through March than the Labor Department originally estimated.
• U.S. GDP fell less than previously thought in second quarter, contracting at a 0.6% annual rate from April to June, down from an initial 0.9% rate earlier.

On the not-so-positive side:

• Durable-goods orders unchanged in July, as businesses pulled back on orders for long-lasting goods, reflecting a cooling in demand amid other signs of a slowing U.S. economy.
• Consumer spending inched up 0.1% in July as inflation remained near a four-decade high.
• New applications for unemployment benefits, which edged higher to 262,000 last week, have been on an upward trend since reaching a 50-year low in March.
• Housing starts in the U.S. declined 9.6% in July from the month before as high inflation and higher mortgage rates make it more expensive to build and buy property.
• U.S. existing home sales fell in July for the sixth straight month, the longest streak of declines in more than eight years, as higher mortgage rates and a shortage of homes for sale are cooling the market.
• Businesses pulled back on orders for long-lasting goods, reflecting a cooling in demand amid other signs of a slowing U.S. economy.

Keep in mind that the above issues are for the U.S. economy, and globally they could be very different. The Conference Board forecasts global GDP growth of 2.7 percent for 2022 and 1.7 percent for 2023.

Given stronger-than-expected Q2 data and upward revisions to Q1, forecasts for the full year 2022 are revised upward for the Euro Area. But as headwinds are intensifying, the Conference Board lowered its 2023 GDP growth estimates.

The full-year 2022 GDP growth projection for China was downgraded by 0.3 percentage points to account for a weaker-than-expected services recovery in the second half of the year.

Investor Takeaway

Apple reported F3Q revenue of $63.4 billion with a June quarter revenue record for iPhone.

At its F3Q earnings call, according to Luca Maestri – SVP & CFO:

“iPhone revenue grew 3% year-over-year to a June quarter record of $40.7 billion despite foreign exchange headwinds as customer response to our iPhone 13 family continue to be strong. We set June quarter records in both developed and emerging markets. And the iPhone active installed base reached a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty.”

Table 2 shows Apple’s revenues for FY2020 and FY2021 and my estimates for FY2022 to FY2024. I forecast that for FY2022 only the iPad will be impacted by the slowing demand for consumer electronics products. Other than that data metric, revenue for each product line will increase yearly.

Apple’s services revenue reaching $112 billion in FY 2024. Importantly, services will grow to 25.6% of total revenues in FY2024, up from 18.7% in FY2021.

Gross margin was guided sequentially lower (41.5-42.5% versus 43.3% in F3Q). Chart 2 shows Apple’s meteoric rise in gross margins over the past five-year period. In my opinion, the possibility of a guided drop holds less significance given it rose from 38% over the previous four years.

Chart 2

My main concern is that despite a positive scenario I presented in this article, technology stock performance continues to be strongly correlated with the 10-year Treasury Rate. I discussed this in detail in my July 1, 2022, Seeking Alpha article entitled “Why Are Tech Stocks Selling Off And What Is The Outlook?”

Chart 3 shows this correlation with Apple shares. U.S. Treasury yields rose again after Fed Chair Powell signaled further interest rate hikes last week. Uncertainty remains high over the course of inflation, energy prices, the war in Ukraine, and economic policy in China. That has resulted in a corresponding drop in Apple shares.

Chart 3

While the 10-year Treasury Rate is increasing and responsible for technology shares decreasing, the two-year Treasury Rate is increasing faster. As shown in Chart 4, this has resulted in an inverted yield curve, with the 10-2 year spread at -0.30%.

Chart 4

An inverted yield curve occurs when near-term risks increase. Investors demand relatively greater compensation from shorter-term Treasuries, and long-term expectations for the economy sour.

There have been six major US recessions, defined by at least two consecutive quarters of negative GDP growth, since 1976. Represented by gray panels in the below chart, all six recessions were preceded by the 10-2 spread going negative, and each recession occurred less than two years after the 10-2 spread first inverted.

Apple’s Sept. 7 iPhone 14 event will provide the press with information on increments of performance improvements beyond the iPhone 13. That seems to be standard operating procedure for Apple with each iteration of iPhone announced. However, it’s the backdrop of this event that provides details about the health of the company amid macroeconomic concerns.

My attempts to “think outside the box” suggest to readers that the “bright spots” in Apple’s timing of the event (a positive) and its ancillary performance in iPhone shipments and market shares (a positive) are a buying opportunity for investors.