Insights

Supply-Chain Woes Hitting Apple for Billions

Apple (NASDAQ: AAPL) is one of the largest companies in the world, but that does not preclude it from experiencing supply-chain problems. One of the lingering effects of the coronavirus pandemic is disrupted supply chains. Depending on the region where an infection rate is on the rise, it could cause varying degrees of labor shortages, which then slows economic output, among other negative effects.
On the other side, consumer demand has been resilient despite the global crisis. With customers buying more products and supplies decreasing, businesses like Apple have difficulty fulfilling consumer demand. Indeed, Apple forecasts that it will miss out on around $6 billion in sales in its fiscal third quarter because it will not have the product to meet robust demand. 
Image source: Getty Images.

The pandemic set off a huge surge in sales
Sales have been booming for Apple since the onset of the pandemic. People who were spending more time learning, entertaining, and working from home looked to Apple’s electronics suite to make it all easier. Revenue increased by 33% for Apple in 2021. The increase was nearly $90 billion more than the previous year’s total, to put that into context. It’s not a simple task fulfilling a $90 billion increase in customer demand in a single year.

AAPL Revenue (Quarterly) data by YCharts
In the first six months of its fiscal 2022, Apple has sustained that momentum. Revenue in the first two quarters reached $221 billion, up from $201 billion at the same time in the year before, despite supply-chain disruptions constraining Apple’s ability to meet all customer demand. Undoubtedly, sales would have been billions higher had it not been for the constraints. To make matters worse, management expects the supply and demand imbalance to continue in Q3.
“Supply constraints caused by COVID-related disruptions and industrywide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of $4 billion to $8 billion, which is substantially larger than what we experienced during the March quarter,” said Apple CFO Luca Maestri in the company’s conference call that followed the second-quarter earnings announcement.
Fortunately, the most significant cause of the shortages — lockdowns in the cities where its suppliers are based — have diminished, and its production is ramping up again. It remains to be seen how long these disruptions last. Consumers worldwide face higher costs for necessities, including food, fuel, and housing. That could cause a decrease in demand for discretionary items like electronics. For now, Apple is fortunate to have an insatiable appetite from consumers for its products and services.

AAPL Gross Profit Margin (Quarterly) data by YCharts
The imbalance can partly explain why Apple has boosted gross profit margins. If you can hardly meet organic demand, there are few reasons to offer discounts, and more of Apple’s sales are coming at full price. Apple’s gross profit margin of 41.8% in 2021 was the highest in the past decade, and management is forecasting a gross profit margin of 42.5% at the midpoint for the third quarter.
Supply shortages are helping Apple’s profits
Interestingly, while supply-chain shortages have worked to constrain sales, Apple has taken the opportunity to boost profitability. Operating income jumped to $109 billion in 2021, up from $66 billion in 2020, and it has continued into 2022. So long as Apple can sustain the trend, shareholders need not worry about lost sales from supply-chain shortages.  

Parkev Tatevosian has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy. –

Apple (NASDAQ: AAPL) is one of the largest companies in the world, but that does not preclude it from experiencing supply-chain problems. One of the lingering effects of the coronavirus pandemic is disrupted supply chains. Depending on the region where an infection rate is on the rise, it could cause varying degrees of labor shortages, which then slows economic output, among other negative effects.

On the other side, consumer demand has been resilient despite the global crisis. With customers buying more products and supplies decreasing, businesses like Apple have difficulty fulfilling consumer demand. Indeed, Apple forecasts that it will miss out on around $6 billion in sales in its fiscal third quarter because it will not have the product to meet robust demand. 

Image source: Getty Images.

The pandemic set off a huge surge in sales

Sales have been booming for Apple since the onset of the pandemic. People who were spending more time learning, entertaining, and working from home looked to Apple’s electronics suite to make it all easier. Revenue increased by 33% for Apple in 2021. The increase was nearly $90 billion more than the previous year’s total, to put that into context. It’s not a simple task fulfilling a $90 billion increase in customer demand in a single year.

AAPL Revenue (Quarterly) data by YCharts

In the first six months of its fiscal 2022, Apple has sustained that momentum. Revenue in the first two quarters reached $221 billion, up from $201 billion at the same time in the year before, despite supply-chain disruptions constraining Apple’s ability to meet all customer demand. Undoubtedly, sales would have been billions higher had it not been for the constraints. To make matters worse, management expects the supply and demand imbalance to continue in Q3.

“Supply constraints caused by COVID-related disruptions and industrywide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of $4 billion to $8 billion, which is substantially larger than what we experienced during the March quarter,” said Apple CFO Luca Maestri in the company’s conference call that followed the second-quarter earnings announcement.

Fortunately, the most significant cause of the shortages — lockdowns in the cities where its suppliers are based — have diminished, and its production is ramping up again. It remains to be seen how long these disruptions last. Consumers worldwide face higher costs for necessities, including food, fuel, and housing. That could cause a decrease in demand for discretionary items like electronics. For now, Apple is fortunate to have an insatiable appetite from consumers for its products and services.

AAPL Gross Profit Margin (Quarterly) data by YCharts

The imbalance can partly explain why Apple has boosted gross profit margins. If you can hardly meet organic demand, there are few reasons to offer discounts, and more of Apple’s sales are coming at full price. Apple’s gross profit margin of 41.8% in 2021 was the highest in the past decade, and management is forecasting a gross profit margin of 42.5% at the midpoint for the third quarter.

Supply shortages are helping Apple’s profits

Interestingly, while supply-chain shortages have worked to constrain sales, Apple has taken the opportunity to boost profitability. Operating income jumped to $109 billion in 2021, up from $66 billion in 2020, and it has continued into 2022. So long as Apple can sustain the trend, shareholders need not worry about lost sales from supply-chain shortages.  

Parkev Tatevosian has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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