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AAPL’s Q3: analysts were half-right … but oh so wrong!

Prior to yesterday’s earnings call, analysts were united in one view on AAPL’s Q3 – that whatever the numbers might be, they were going to be affected by the coronavirus crisis, so we shouldn’t read too much into them.

The assumption was that disrupted supply-chains, store closures and an economic downturn would all hit sales of Apple products. It turned out they were half-right … but very wrong!

Analysts though Apple’s revenue would be down year-on-year. Philip Elmer-DeWitt’s roundup showed that the average estimate for the professional analysts was $51.91B, or around $2B down on the previous year. The result, of course, was very different: Apple announced record Q3 revenue of $59.7B.

Analysts were right that the pandemic would affect Apple’s revenue, but totally wrong about the nature of that impact. Far from people spending less money in AAPL’s Q3, people spent very much more.

The reason, as CFO Luca Maestri mentioned in the call, is that working and studying from home meant people bought Macs and iPads to facilitate that.

It’s clear to us our products are very relevant to our customers lives and the pandemic has them more relevant than ever before. Working from home, online learning — both trends are helpful.

CEO Tim Cook echoed this in an interview with Bloomberg,

Cook said the pandemic likely boosted iPad and Mac sales due to lockdown rules and an increase in remote learning.

This appears to be quite the understatement. Mac sales were up 21% year-on-year, and iPad sales were up a massive 31%. There’s likely a mix of three things at play there, from consumers and companies alike:

  • Upgrading from older devices that were starting to show their age now they are seeing more use
  • First-time purchases now being stuck at home justifies the spend
  • Switches from Windows machines as having a more usable device again justifies the investment

Even iPhone sales were up 1.66%, despite store closures and job losses. The likely explanation for that is the success of the iPhone SE. It may not be my idea of an iPhone SE 2, but it’s a great way to get an iPhone that will be good for 5+ years at an affordable price.

As expected, Apple gave no guidance for the current quarter, but did give one important steer: the iPhone 12 will be delayed by several weeks. Of course, Apple being Apple, it didn’t reference the new devices by name, simply referring to them as ‘the new product.’ Still, even that much is unusual for a company which generally doesn’t even admit what everyone knows: that new iPhones are coming.

Unsurprisingly, analysts have been raising their price targets for AAPL, with varying degrees of acknowledgement about how far they underestimated AAPL’s Q3 results. Goldman Sachs, which was one of the most pessimistic, was upfront about its error – though still urges caution.

It turns out that we and consensus weren’t even in the ballpark in terms of what was possible. As we had indicated in our preview we continue to believe that caution is warranted looking into 2021 as our earnings forecast remains well below consensus. However, we equally believe this is a quarter to give Apple credit where credit is due for excellent execution and performance in the midst of unprecedented difficulty.

Gene Munster was likewise refreshingly frank.

We were expecting the Apple’s June quarter numbers to be noisy, magnified by the pandemic. We were wrong.

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