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July 28, 2021updated 30 Jul 2021 3:57pm

Cook repeats chip shortage fears: How worried should Apple really be about it?

By Eric Johansson

Is Apple pulling a fast one? The Cupertino-headquartered tech titan has just delivered blowout quarterly results. Surging iPhone sales drove revenue up by 36% to $81.4bn, which took year-on-year profits from $11.3bn to $21.7bn.

That’s despite Apple warning in April that the worldwide chip shortage could see it lose out on up to $4bn in iMac and iPad sales in the third quarter.

Now Apple CEO Tim Cook is again cautioning about how the worldwide semiconductor shortage could scupper sales. So what’s going on here?

Chips ahoy

Let’s start with the basics. Apple isn’t pulling the chip shortage out of thin air. The chip dip is a very real thing.

Over the past year, Covid-19, severe weather, factory fires and soaring demand for silicon have caused an unprecedented shortage affecting multiple sectors such as automakers and tech companies. Some industry stakeholders estimate that the shortage could last well into 2022, if not longer.

So it wasn’t too surprising Apple, announcing excellent results in April, cautioned that the chip shortage could impair hardware sales in the three months leading up to June 26.

Luca Maestri, Apple’s CFO, warned in April that he believed “that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior [years].”

At the same time, GlobalData’s thematic research noted that Apple is also facing other challenges such as intense competition and foreign exchange risk.

Despite these clouds on the horizon, Apple announced it had achieved $81.4bn in quarterly revenues yesterday. The figure marked Cupertino’s best June quarter results ever.

iPhone sales continued to lead the way. Apple’s smartphone sales jumped by 50% compared to 2020, skyrocketing to $39.57bn.

The iPhone sales “exceeded our own expectations as the iPhone 12 family continued to be in very high demand,” Maestri said on an investor conference call on Tuesday. iPhone 12 was first released in October 2020.

Revenue for iMac hit $8.2bn in Q3, up 16% year-over-year. Apple’s iPad lineup was also up 12% year-over-year to $7.4bn.

Apple still to feel chip shortage

However, Cupertino argued the record sales weren’t because the semiconductor crunch had gone away, but despite it. Cook told CNBC that the $2.42tn behemoth had been “able to mitigate” some of the chip crunch.

He noted during the investor call that the chip dip hasn’t gone away. He argued that the iPhone maker still faces significant “supply constraints”. Notably, those shortages would extend to smartphones, and not just to desktops and tablets, in the upcoming months.

“The majority of constraints we’re seeing are of the variety that I think others are seeing, that I would classify as industry shortage,” Cook said on the conference call.

When asked, Cook didn’t want to predict how long the chip shortage would last for Apple. Maestri also dodged the question of how hard the chip shortage would hit Apple. However, he expected the upcoming slump “to be greater than what we experienced during the June quarter.”

Still, Apple expected “double-digit” growth over the $64.7bn it reported in the three months leading up to September 2020.

Welcome warning

It is tempting to make “boy who cried wolf” parallels, following the second chip shortage warning as the first didn’t seem to cause too much of a problem. However, market experts believe Cook is right to be cautious.

“The global chip shortage is not going away any time soon, unless there is a totally unexpected dip in demand, as the world waits for the build out of extra capacity currently under way to come de-bugged on stream by 2023 and beyond,” Michael Orme, GlobalData analyst, tells Verdict.

“Cook made clear that it’s not the high-end 7nm and 5nm A Series iPhone processors that are the problem. The problem lies in getting the entire set of parts in place for assembly on time, especially the low-end chips that drive displays and decode audio for instance.

“It is they that are in short supply even for premium foundry customers like Apple. This is the issue which continues to hammer the auto industry. It can’t get the chips costing a few cents to control turning on dashboard displays for example. So yes. Cook was right to issue a warning this time as well.”

Apple diversifies

Cupertino’s quarterly results highlight that Apple, chip shortage or not, is still heavily dependent on smartphone sales. It’s been that way for some time. Being dependent on one solution is always a risk. So, Apple has understandably been hard at work for some time to diversify its income.

Apple’s services segment is key to that push. This segment includes everything from Apple Music, App Store subscriptions – which is central to Apple’s legal dispute against Epic Games – Apple Arcade, AppleCare, Apple TV+, iCloud storage and Cupertino’s financial services segment.

Net sales in this sector “set a new all time revenue record”, Cook noted. This grew by 33% to total $17.48bn in the third quarter. That’s less than a third of the $63.94bn in sales for Apple’s products.

This segment may grow. Cook himself made a point out of celebrating the service segments success during the conference call.

“We’re proud to be the recipients of 35 Emmy nominations this year, which speaks to the quality of our programming and an the enthusiastic reception from customers and critics alike,” he said.

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