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Wealthy consumers will help Apple resist the effects of inflation

Wealthy consumers will help Apple resist the effects of inflation
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An employee arranges the Apple iPhone as a customer store in the Apple Store.

Mike Seger | Reuters

Last time Manjana Faced with such an inflationary environment, it was a public company for less than a year and its best-selling product was the Apple II home computer.

In May, d Annual inflation rate In the United States it was 8.6%, the highest level since 1981. Other major markets for Apple sales are seeing similar or even higher levels of inflation.

Apple faces rising costs due to global supply and rising employee salaries, as well as customers will stop upgrading their iPhones due to declining purchasing power. Apple is facing supply constraints related to China’s shutdown this year which could have consequences আঘাত 8 billion revenue hit.

Many companies, especially those that have the ability to price, can send increased costs to their customers by raising prices, especially if demand is strong. Apple has not increased the price of the iPhone in the United States, but regularly tweaks Pricing around the world in response to currency fluctuations. Over the years, Apple has changed its product pricing structure for the slate of its new devices in the fall.

By keeping prices stable to avoid denting demand, Apple could also incur some costs, hurting its margins.

“From an inflation perspective, we’re seeing inflation,” said Apple’s CEO. Tim Cook Said one of the investors Earnings call In April. “It was clear in the last quarter and our gross margin in the last quarter of our OpEx and it is assumed in the guidelines that [CFO] Luke [Maestri] Also paid for this quarter. So we’re definitely looking at some level of inflation that I think everyone is looking at. “

Rising costs

Cook said there are at least two places in the company’s balance sheet where inflation is seen: gross margins and operating costs.

Apple’s gross margin for the quarter was 43.7%, higher than analysts’ expectations, but slightly lower than the December quarter, the highest since 2012, according to factset data.

Apple’s margins will shrink in the June quarter, dropping between 42% and 43%, Maestri said. However, Apple’s margins expanded during the epidemic, and they are still at an all-time high.

Operating expenses for the quarter were $ 12.58 billion, an increase of about 19% year-on-year. In the June quarter, Apple forecast continued growth in operating costs to about .8 12.8 billion.

Tim Cook speaks on stage at the Jazz TIME100 Summit 2022 at the Lincoln Center.

Jemal Countess | Getty Images Entertainment | Getty Images

Freight charges are a source of that cost.

“Freight is a huge challenge,” Cook said in April. “From an inflation point of view and from an availability point of view.”

Another rising cost is related to the silicon shortage driven by China’s Covid-19 lockdown in the first half of the year, and the overall lack of low-quality chips needed to complete its products. Cook, however, said some ingredients are getting cheaper.

Apple may also face rising labor costs. The company is raising salaries Including some competitors, in response to market conditions for its corporate and retail workers Google, amazonAnd MicrosoftTop tech talent changed their compensation earlier this year to attract and retain 6

“Other companies that follow us have lost margins in cost inflation, but Apple sees its cost basket as relatively stable because lower product costs offset higher labor and freight costs,” Morgan Stanley analyst Katie Huberti said in a note after the earnings report.

Potential slow sales

But increased costs are not the worst case scenario for Apple. The big risk is if inflation and other macroeconomic conditions hurt demand for Apple products.

Traditionally, during a recession or in the face of declining purchasing power, consumers have stopped buying sustainable products, including electronics, economists say.

In Apple’s case, this could mean that customers who bought a phone two or three years ago may decide not to upgrade to the new model this year and keep spending off until the economic situation improves.

“Sometimes you just take a few precautions and postpone shopping,” says Jim Wilcox, an economist at the University of California, Berkeley. “A very intelligent financial strategy to wait and see.”

Investors have largely felt more comfortable that Apple customers are loyal and therefore probably continue to upgrade their devices regularly, but an inflation-related recession may call into question that conviction, causing multiple losses to Apple’s revenue.

“In the case of Apple, they have a very strong ecosystem, their customers are very loyal,” Bernstein analyst Tony Sakonaghi said. Said on CNBC This week. “But most of their revenue is generated from product sales and it’s largely driven by loyal customers, and if you fall into recession, customers may delay purchases or upgrade. So that the revenue stream doesn’t just repeat, it’s basically transactional.”

There are apples No signal yet Weakness. In April, it said demand was high and suggested it did not show signs of declining consumer confidence. The big problem was creating enough supplies to meet the demand for his products.

But the market for smartphones and laptops is showing signs of slowing down. The high-end segment of the smartphone market, where Apple sells, holds up better than bargaining, although overall phone sales have begun to decline. Micron technologyMemory supplier for Apple devices, Warned on Thursday It expected that both smartphone sales and PC sales would be significantly lower than previously estimated as consumer demand weakened due to rising inflation around the world.

According to recent estimates, unit shipments of so-called premium devices priced at $ 400 or more fell 8% in the first quarter, compared to 10% of the overall market. From Counterpoint Research.

Wealthy customers blow cushions

Apple may incur some additional costs. Its sales have been growing over the past two years, and it maintains a healthy margin that envies its hardware competitors.

But Apple may not have to eat that high cost at all.

Consumers have a significant disposable income trend compared to buyers of Android devices, who choose based on price.

According to Counterpoint, on phones priced in the “ultra-premium market” or over $ 1,000, Apple accounted for 66% of unit shipments in the first quarter.

“With rising global inflation, it may be difficult to hit parts of the entry-level and low-value bands,” Counterpoint researchers wrote.

A Morgan Stanley survey from June said 70% of U.S. consumers plan to cut spending over the next six months due to inflation. But wealthy families – Apple’s customers – were more positive about their finances and the direction of the economy.

“Households with $ 150K + income are more resilient; the highest progress in the reduction plan is observed among middle-income groups,” wrote Morgan Stanley analysts.

Apple has raised the price of its iPhone several times in the last five years.

In 2017, Apple introduced a high-end $ 1,000 iPhone model, which attracted a significant proportion of customers who were willing to pay for a more powerful device. More recently, Apple quietly Prices have risen in 2020 While it raises the starting price of the main line, the best-selling model – the iPhone 12 at the time – ranged from $ 699 to $ 799.

Reuters mentioned Apple on Friday raised the price of its flagship phone in Japan by almost a fifth, with the entry-level iPhone 13 now priced at 870.

Can the company raise prices more broadly this year? Cooking It did not cancel.

Clock: The lockdown in China could cost Apple 8 8 billion

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