Oppenheimer senior analyst Martin Yang joins Yahoo Finance Live to discuss Apple’s iPhone production challenges, whether Apple is still a defensive stock and Elon Musk’s spat on Twitter with the tech giant.
Video transcript
Brad Smith: Apple’s iPhone Pro production is expected to be hit due to ongoing disruptions at a key manufacturing plant in China, according to Bloomberg, and could affect up to 6 million units of the device. Joining us now is Oppenheimer analyst Martin Yang to discuss future financial implications for Apple.
Martin, nice to have you with us today, and thank you for taking the time. First of all, when you think about what that short-term impact might look like for Apple given the production disruptions, you know, what do you think that number looks like right now?
MARTIN THE: Sure. Yes, some calculations on the back of the envelope suggest that when we consider the capacity loss in November and December, if we factor in a 30% loss in a single month, that would translate to 3 and 1/2 to 4 million units of iPhone Pro, 14 Pro and Pro Max production shortfall.
If this loss of capacity reaches 50% for a single month, this translates to more than 6 million units. And so far, our base case is a 30% capacity loss. But based on recent developments, it looks like this loss of capacity may continue through November and possibly extend into December.
JULIE HYMAN: Martin, you, like many analysts, however, also say that they will then catch up on that capability, okay, early next year. But if they don’t catch up before early next year, what will be the implications for the holiday season? Will Apple take a hit in sales because people will want to buy the phones and can’t get them?
MARTIN THE: The loss of holiday sales is therefore already happening. And like when I checked last week and the earliest date you could get your hands on the iPhone Pro and Pro Max in the US, as well as China, is well after Christmas. I think the first day was late December.
And now you’re out of luck if you’re trying to get an iPhone by Christmas. So as soon as possible, you can get it in January. Holiday sales are already… part of the holiday sales are already lost.
BRIAN SOZZI: Martin, is Apple, at this point, just a stockpile of Teflon? If worries about iPhone shortages this holiday season won’t drive the stock down, if recession fears won’t drive the stock down, what could drive the stock down?
MARTIN THE: I think there are two main issues facing Apple for 2023. The first is that we’ve seen two years of a very solid upgrade and replacement cycle for the iPhone starting with iPhone 12, ‘iPhone 13, iPhone 14 this year, and that the strength of the replacement cycle may weaken in ’23 by two factors. One is that the majority of the install base is most likely to upgrade already has a new iPhone.
And then continued macroeconomic pressure will cause some consumer groups to delay upgrading. And then second, there’s continued pressure on Apple’s service software revenue. For example, if Apple is forced to reduce its App Store tick rate from 30% to 15%, this could put temporary downward pressure on Apple’s margin, as well as its revenue.
Brad Smith: Do you see consumers looking at the rest of the Apple ecosystem and saying, you know what, I don’t need another watch, or I don’t need an iPad or wearables? How might that also impact other parts of that larger hardware ecosystem that they have, but also the services that depend on that install base that continues to grow?
MARTIN THE: I think these individual pockets of consumer sentiment have a rather insignificant impact on Apple’s overall results, as Apple still sees a very high percentage of new consumers entering the ecosystem via Apple Watch, iPad, and MacBook. And these are very good leading indicators of the future growth of its software and services revenues. So as long as we’re still seeing these healthy new users entering the system, I’m not that worried.
JULIE HYMAN: Martin, I want to shift gears and turn the subject to Twitter for a moment and Elon Musk’s seemingly new war with Apple and with Tim Cook on the App Store on what he’s saying is that Apple doesn’t is not on the side of freedom of expression. Apple – I think it’s pretty well known what Apple requires for app developers to be on the App Store.
What do you – and also, I think it’s safe to say, Twitter needs Apple much more than Apple needs Twitter. But what do you think? Is it just a blip? Is this something investors don’t need to pay attention to?
MARTIN THE: I think investors need to be careful of this spat between Elon Musk and Apple. It highlights two major issues. The first concerns Apple’s content moderation standards for applications passing through its App Store. Second, is Apple eligible for the 30% App Store fee?
The first problem is much more complicated because if you look through Twitter I would say the power struggle between Twitter the app and Apple as a platform, Apple has a lot more power over Twitter because the content available on Twitter doesn’t live up to scrutiny, and some of the content is – I think Apple will be able to argue that some of the content is distasteful and anywhere on the spectrum of distasteful and dangerous.
So if Apple wanted to, I think Apple could make the case for removing Twitter from its platform. And also considering that Twitter has a reduced staff on content moderation and that puts Twitter the app for more risk in the future.
And then on the subject of the 30% app store fee I think that jeopardizes Twitter’s change to the subscription plan because they want to have the blue tick at $8 a month that Apple is in right to charge between 15% and 30% of the costs of this subscription if it is made via the integrated purchase. And I think Twitter is less risky because many users use Twitter through PC and other non-mobile platforms or non-mobile channels.
Brad Smith: How well does apple present itself also given that they have a digital advertising business that they are trying to grow and continue to allow competition given the install base they have but also how many advertisers and marketers realize where in the funnel Apple users also fit into this kind of larger marketing ecosystem and what buying decisions they can make more easily?
MARTIN THE: Now, in terms of direct competition in digital advertising, I think there may be less overlap between Twitter and Apple. Apple is going after a lot of app stores and a lot of programmatic advertising and also search ads on the app store whereas Twitter has a lot more brand advertising exposed so it’s a market that Apple currently doesn’t really play a big role in.
JULIE HYMAN: Martin, thank you very much. Really great to have your perspective on this. Oppenheimer Principal Analyst Martin Yang.
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