Apple’s size allows 'flexibility with the supply chain': Analyst

Cowen Analyst for Semiconductor Equipment, Manufacturing & IT Hardware Krish Sankar joins Yahoo Finance Live to discuss historic first quarter revenue earnings for Apple, catalysts for the company, and the outlook for supply chain issues.

Video Transcript

JULIE HYMAN: Apple coming out with record revenue, as we have been talking about, last quarter. It says it's going to have record revenue this quarter as well, even though the momentum might slow a bit. The only area where we saw some disappointment in sales perhaps was with the iPad. Other product lines held up well.

So let's dig into this quarter with Krish Sankar. He is Cowen Analyst and-- of semiconductor equipment, manufacturing, and IT hardware. Krish it's good to see you this morning. So as we consider these numbers, one of the big questions for me is this whole idea of a semiconductor shortage and how Apple navigated it.

Apple itself said it wasn't going to have great results. It was going to be challenged by that shortage. Doesn't seem to be certainly as much of a challenge as it anticipated. How did it do that? Is it just a question of size and negotiating power or diversification of supply chain? Like, what did it do?

KRISH SANKAR: Yeah. Julie, thanks for having me. I would probably say the answer is a little bit of all of the above. Clearly, the scale and size does allow them a lot of flexibility with the supply chain. The other thing is also, because of that, they can secure or source components ahead of many other competitors. And then the third one is also a little bit more effective supply chain management. And Apple has always done a pretty good job of it.

If you look at the numbers, a little over $6 billion impact from supply constraints, which is roughly over 5% of revenues. I would say that if you look at most semiconductor companies that have been impacted by the semiconductor shortage, the impact on a quarterly revenue basis has been around, like, 10%, give or take. So Apple at roughly 5% or so is actually better off than most other companies in the ecosystem are being impacted by semiconductor shortages. So I think they've definitely done a better job.

The one other thing I'd probably highlight, Julie, is that the December quarter is a seasonally strong quarter, right? So then-- and that doesn't impact the over $6 billion in a total revenue base of $1.3 billion. If you look at the numbers, March worth is going to be more like high-90s billion. And I would probably say that just purely because of seasonality bringing revenues down, it does probably help moderate the impact of supply constraints in March relative to December.

BRIAN SOZZI: Krish, if a global pandemic is not going to slow down Apple, is there anything this year that might clip their momentum?

KRISH SANKAR: Well, Brian, I would probably say that there are a lot of variables to worry about, right? Obviously, COVID shutdowns is one. We also always have to worry about the political landscape, US-China politics, any kind of antitrust reviews from the government, especially on the services side.

So I would probably say that there are a list of things that-- something on the back of the mind. But I would say overall, Apple has done a very good job in navigating all the challenges, whether it's supply constraints, whether it's global pandemic issues, political challenges, US-China politics. So I think overall they've done a great job. I think kudos to the management team for that more than anything else. Excuse me.

JULIE HYMAN: So Krish, you mentioned China. And I want to dig into China a little bit also because the company retook the top spot in market share there during the quarter, which was also perhaps a little bit unexpected. It seems as though one of the ways it did that was keeping pricing rational for the iPhone 13, which I believe it priced the same as the iPhone 12. Is that something it can continue to do, though, in China and do you expect it to continue to do? Is it going to hang onto that top spot?

KRISH SANKAR: So I think-- Julia, I think there are two components that have helped our market share in China. Obviously, a rational price is one of those. The second one is, I would say, kind of, like, the quote, unquote, "demise or scaling back" of Huawei since the US sanctions in mid-2020.

I would say right around mid-May, when the US sanctions came into effect for Huawei, Apple's market share in China for smartphones was around mid-single digits, give or take 5%. Now, it's, like, probably, like, high teens or even higher than that.

So the last year and a half or the last 18, 19 months, I would say Apple has been able to capitalize on Huawei being penalized. And I'd also say that because when it comes to, like, leading edge smartphones in China, now Apple has gained tremendous market share. There are some initial concerns heading into Q2 or so on because a spin-off of Huawei might have a high-end phone. But I would probably say a large part of the reason is also Apple's ability to effectively capitalize on the momentum that they started gaining close to Huawei. And that's kind of driven the market share from mid-single digits to, I would say, like, high teens or even higher.

BRIAN SOZZI: On the topic of momentum, Krish, Apple highlighting strength in their fitness offerings in the most recent quarter. They had billions of dollars of cash on their balance sheet. Should they go out there and buy Peloton?

KRISH SANKAR: [LAUGHS]

That's been a question that investors have been asking me for the last three, four months. And I honestly don't have a good answer to that, but let me rephrase it this way, right? If you look at their M&A strategy, Apple has done a ton of M&A in the last several years, but most of them have been bolt-on acquisitions or tuck-in acquisitions, the largest, I think, being, like, Beats at $3 billion.

So I think if you ask me the way things are today, it seems like the blueprint for M&A is still what has worked in the past. That doesn't mean that I-- they will not go out and do a big M&A, but I would probably say the chances of it happening are pretty low. And the second thing, Brian, I would say is that Apple's net cash is well over $60 billion. They have spoken about getting it to neutral.

It's been in this high range for a while. And when you have, like, almost $200 billion in cash, the world is your oyster. And I feel like predicting what they're going to buy next, I'm not smart enough to do that.

JULIE HYMAN: That never stops Brian Sozzi. No, I'm just kidding.

BRIAN SOZZI: Got to ask.

JULIE HYMAN: We like to have fun here imagining what might happen next. And we don't have to deal with compliance like you, Krish, so we can have our little flights of fancy, can't we? Krish Sankar, thank you so much, Cowen Analyst. He covers semiconductor equipment, manufacturing, and IT hardware. Thanks.