The case for single-stock ETFs

With a wave of single-stock ETFs hitting the marketplace this summer, more firms are expanding their product lines to include funds that home in on the daily activity of one particular security.

"These are tools that are really intended to be used as a tactical trading vehicle," Dave Mazza, managing director and head of product at Direxion, told Bob Pisani in an interview on CNBC's "ETF Edge" on Monday.

"Specifically, someone who has the ability and interest to monitor their positions on a daily basis," he added. 

Direxion launched the first four of its single-stock leveraged and inverse ETFs last week that allow traders to obtain magnified or inverse exposure to the daily performance of Apple and Tesla. The Daily TSLA Bear 1X shares (TSLS), Daily TSLA Bull 1.5x Shares ETF (TSLL), Daily AAPL Bull 1.5x (AAPU) and Daily AAPL Bear  1x (AAPD).

There are currently single-stock ETFs for Tesla, Apple, Coinbase, Nike, Pfizer, Paypal and NVIDIA, allowing investors to go both leveraged long and to bet short against individual stocks. Tesla in particular has attracted interest, with five single-stock products.

"There was a regulatory rule change in the last couple of years that allowed this to happen," Will Rhind, CEO of GraniteShares, said on 'ETF Edge' on Monday.

"We've had leveraged products on broad indices such as the QQQs, we've had leveraged ETFs on commodities which have been very popular," he said. "And so now single stocks are the next generation in that category."

GraniteShares also listed its suite of short and leveraged single-stock exchange traded funds last week: the 1.25x Long Tesla Daily ETF (TSL), 1x Short TSLA Daily ETF (TSLI), 1.75x Long AAPL Daily (AAPB) and 1.5x Long Coinbase Daily (CONL).

As single-stock product launches accelerate, SEC Chair Gary Gensler has already voiced his concerns ETFs. In a speech in May, he said these funds "can present unique and potentially significant risks to investors across market sectors."

"There are some proposals in the table to limit the exposure to the retail community of complex ETFs," Reggie Brown, principal at GTS, said on "ETF Edge" on Monday. "I think that's a giant mistake."

Brown explained that the concept of a single-stock ETF is not a new idea, but first proposed in 2009 when low-priced corporate equities were trading in the teens. And certain institutional investors could not hold low-priced securities.

"It serves a purpose," he said. "I think that this type of ETF has the ability to have a thousand different corporate equities inside them and bring innovation to the marketplace. This is a good thing."

Mazza added that broker dealers have put rules in place to make it clear that the products are intended to be used as trading vehicles, such as an aggressive trading profile.

"As opposed to limiting access, we believe that we need to promote education and the utility of how these products can be used," Mazza said. "But also, there may be a need — particularly in heightened times of volatility — for those who are interested and those who understand the inherent risk to express viewpoints and amplify their exposure on a daily basis."

Volumes in leveraged and inverse ETFs have soared since the start of the pandemic, and the demand has held up in 2022. The boost in trading volume of leveraged and inverse ETFs such as SQQQ and its opposite TQQQ has led to the Nasdaq-indexed ETFs outpacing the S&P 500 in the second quarter of 2022.

"During Covid, we had more engagement by new retail investors into the marketplace," Brown said. "And as they understood more of the products that were available for them to express themselves their views, we saw an explosion in trading from a day trading perspective."

Brown said that there are likely some investors that have amplified returns, with daily returns of anywhere between 4% and 10%. It boils down to suppliers like Direxion and GraniteShares fulfilling a demand, he said.

"There's institutions that want to use these products, and there's big demand for them," Brown said. "If you look at the high-priced stocks such as Tesla, there's a lot of day trading in these corporate equities and having it into an ETF provides leverage. It's just meeting a need."

Source https://www.globalcourant.com/the-case-for-single-stock-etfs/?feed_id=12736&_unique_id=62febc8794248

Apple and Meta headsets could face a big challenge: Sticker shock

Apple and Facebook parent Meta are expected to release mixed reality headsets in the coming year that could finally fulfill the industry's promise to turn head-worn devices into the next big shift in personal computing.

But there's one major potential snag: sticker shock.

The best-selling virtual reality headset, the Meta Quest 2, retails for $400 and accounted for 78% of the nascent VR market in 2021, according to IDC. Consumers who want the next-generation technology are going to have to spend multiples of that.

Meta's forthcoming high-end headset, codenamed Cambria, is expected to cost at least $800, the company said earlier this year. Apple's unannounced device could reportedly cost thousands of dollars. That's a hefty load for products in a category that's yet to go mainstream. Just 11.2 million VR units were shipped last year, IDC said. Apple sells that many iPhones every few weeks.

To expand the market, Meta and Apple will have to convince consumers that more advanced systems will be worth the investment. Both companies are reportedly betting on a new technology called passthrough mixed reality, which requires better displays and more processing power.

If passthrough mixed reality works as advertised, a VR headset would also function as a set of augmented reality glasses, enhancing the possibilities for applications and real-world use.

With existing VR devices, the experience is limited to what's on the headset's display. In passthrough AR, powerful cameras on the outside of a VR headset take video of the outside world and send it to two or more displays, one each in front of the user's eyes.

This allows for developers to play with mixed reality, overlaying software or graphics on the video of the real world from just outside.

Believers in mixed reality say that we'll eventually be able to condense the technology into a lightweight pair of glasses with transparent lenses. But that's for the future.

The passthrough approach is emerging as the preferred near-term option because optical transparent displays are nowhere near ready for primetime. The problem for today is that passthrough mixed reality requires a lot of expensive parts and a powerful headset, limiting the size of the market.

In addition to the advanced cameras, passthrough devices need depth sensors that can take detailed video and measurements of the user's surroundings. They also have to track the user's eyes so as not to waste power generating graphics that will go unseen. And they need powerful processing capabilities and software to reduce latency so that what the user sees inside the headset isn't delayed or blurred.

Read more about tech and crypto from CNBC Pro

Most important is the high-resolution screen that needs to be much denser than a smartphone display because it's so close to the user's eyes. Smartphone screens average about 550 pixels per inch, but mixed reality devices require displays with about 3,500 PPI, according to CounterPoint Research.

While Meta and Apple haven't released their headsets, a few devices currently on the market support passthrough mixed reality. The experiences tend to be limited — black and white or low-quality video — because of a lack of processing power.

A few weeks ago, I was able to test a headset from Varjo, a Finnish company co-founded by Urho Konttori, a former Microsoft and Nokia executive. Last year, Varjo released the XR-3, which offers full-color, low-latency passthrough mixed reality. It's expensive, heavy, and aimed at businesses. It costs $6,495 to purchase or about $1,500 to rent it for a year.

In playing around with the XR-3, I felt less isolated than with other VR headsets.

Varjo's XR-3 headset

Varjo

I could access a virtual world with the press of a single button, and I could pull up games that took over my entire field of view. I could use virtual computer monitors displaying Windows applications inside the virtual world.

I was also able to interact with the world around me through Varjo's passthrough view. In the demo, Varjo placed a life-size car model inside the space. I was able to walk around it and inspect its interior and discuss what I was seeing with someone who wasn't wearing a VR headset.

Most impressively, when passthrough was turned on, I could interact with the actual environment around me, carrying on a conversation with the person next to me or finding a chair and sitting in it. This isn't possible with existing VR technology, which forces you to remove yourself from the physical world.

Konttori told me that was one of his main goals. The company wants to almost mimic "human-eye" display quality, which he calls the "holy grail" of mixed reality.

'A single coherent scene'

The XR-3 has two 2880 by 2720 pixel displays, and the company uses eye tracking to focus its processing power to deliver better image quality where your eyes are looking.

The key is "being able to merge the physical reality around you with the virtual reality objects and make it into a single coherent scene, where you cannot tell apart what is real and what is virtual anymore," Konttori said. "Part of this evolution is that you can see that at some point, the fidelity of this experience is equal to what you would perceive by looking at it with just your own eyes."

However, to use the XR-3 you have to be tethered by a cable to a powerful gaming PC. Meta and Apple are focused on developing devices that don't require attachment to a separate computer. Konttori knows it will be hard for his startup to compete with some of the biggest tech companies in the world, but he says Meta and Apple still face challenges.

That's because developing a consumer-friendly product with the right weight and power consumption is very tricky, especially when it comes to keeping costs down and shipping millions of them.

"Companies are focusing on consumer-alike experiences, which means that they are still really driven by the size, weight, ergonomics point of view, as well as cost," Konttori said.

An attendee wears a HTC Corp. Vive virtual reality (VR) headset during the Apple Worldwide Developers Conference (WWDC) in San Jose, California, U.S., on Monday, June 5, 2017.

David Paul Morris | Bloomberg | Getty Images

Apple is notoriously secretive about its product roadmap, especially when it comes to new categories. The company has invested heavily in virtual reality research and development in its Technology Development Group and has purchased several startups specializing in mixed reality technology.

According to reports from Bloomberg and The Information, Apple is developing a mixed reality headset that resembles ski goggles with a powerful homegrown chip, similar to what powers its MacBook laptops, and higher-resolution displays than what's currently on the market.

The headset will reportedly support passthrough video and offer games and other applications. At one point, Apple was aiming for at least resolution similar to a 4K TV per eye for its first headset, because anything less could result in users seeing individual pixels, The Information reported.

Apple hasn't confirmed its plans to release a mixed reality headset, and the company didn't respond to a request for comment on this story. In an interview with Chinese media earlier this year, Apple CEO Tim Cook suggested that something is in the works.

Meta has said Project Cambria, with support of color passthrough, is scheduled to be released later this year. Based on renderings of the device that have been made public, it also looks like a pair of ski goggles. It will include pancake optics, a type of lens that doesn't need to be calibrated as finely as other VR lenses.

Meta said in May that the price for Cambria would be "significantly higher" than $800.

While passthrough technology has yet to hit the market in a real way and will be quite pricey once it does, metaverse developers are rallying behind it. The primary alternative, optically-based mixed reality, uses transparent displays built into lenses to integrate computer graphics with the real world. Microsoft's Hololens and Magic Leap use optical waveguides, a type of transparent display.

Transparent displays are also expensive, and they have their own sets of challenges. They're not good when used in bright daylight, and the current offerings can suffer from poor image quality and blurry text.

Varjo is making a bet on passthrough technology and Konttori says it's the better approach in large part because it's completely digital, putting more control in the hands of developers.

"It becomes computable," Konttori said. "It becomes a tool for artificial intelligence to be participating in your world, enhancing your view or your intellect, and you can distort the world in the tiniest ways or the biggest ways possible."

He expects passthrough to be "the winning approach for a very, very long time."

WATCH: The future of entertainment is mixed reality gaming experiences

Source https://www.globalcourant.com/apple-and-meta-headsets-could-face-a-big-challenge-sticker-shock/?feed_id=11924&_unique_id=62fc5bb28f0c2

Morgan Stanley on market bottom and tech stocks, Nasdaq

Source https://www.globalcourant.com/morgan-stanley-on-market-bottom-and-tech-stocks-nasdaq/?feed_id=6763&_unique_id=62ec6ff0a8078

Stocks head into August with a tailwind, as investors await jobs data and a slew of earnings

From Caterpillar to Amgen, dozens of large companies report earnings in the coming week, but it may be big economic data, such as Friday's jobs report, that takes over as a major market catalyst.

Monthly employment reports are always important, but the next few may be even more so. Federal Reserve Chair Jerome Powell made it clear at his press briefing Wednesday that the Fed's September rate decision will depend on economic data.

Stocks rallied in the past week, helped by better-than-expected earnings reports and a view that the Federal Reserve may not be as aggressive as it forecast when it comes to interest rate hikes.

The major stock market indexes ended July with their best monthly performance of the year, and the S&P 500 and Dow scored their best months since November 2020. The Nasdaq's 12.3% gain was its best monthly performance since April 2020.

The S&P was up 4.3% for the week and 9.1% for the month of July. It is still down 13.3% for the year. The Nasdaq was up 4.7% for the week. The Dow was up nearly 3% for the week and 6.7% for the month.

"Earnings stink, but they're not as bad as they could have been," said Sam Stovall, chief investment strategist at CFRA. "The Fed raised rates the most aggressively since 1981, but that's good because the economy is slowing down, and that's good because the Fed might start tapering its tone."

Some of the biggest names in tech delivered earnings beats in the past week, and their stocks were higher, such as Apple, Microsoft and Amazon. There have also been some big misses and negative forecasts, like from Meta Platforms and Intel. Intel was down 8.6% Friday after its earnings miss and lowered forecast.

"Thus far the market has been able to digest it," said Art Hogan, chief investment strategist at National Securities. "A lot of this is better than feared. If that process continues, it's likely to help the market grind higher. The market seems to be sitting on this notion that we had priced in Armageddon and thus far, that has not been thrust upon us."

Hogan said many investors were caught underinvested or even short stocks during the July rally.
"That helps throw some gasoline on the fire," he said.

In the week ahead, there are 148 S&P 500 companies reporting earnings. Reports come from a diverse group of companies, such as health-care names Eli Lilly, Gilead Sciences and Amgen. There will also be reports from travel-related companies, such as Uber and Booking Holdings.

Stocks enter August riding the optimism of July, but since 1995, the S&P 500 has declined by an average 0.5% in the month, according to CFRA. August has also been the third most volatile month, and only three major S&P sectors over that time had averaged gains for the month: real estate, technology and utilities.

Tech's outperformance during the month does help the Nasdaq, and the Nasdaq 100 increased an average 0.9% in August, going back to 1995, according to CFRA.

"It's a month that could go either way because it has among the highest single monthly advances while at the same time among the deepest single monthly decline," said Stovall. For instance, the S&P 500 gained 11.6% in August 1992, and fell 14.6% in August 1998.

Stovall said the S&P 500 could be tested early in the week. The S&P ended the week at 4,130. "Around 4,150 is a very important resistance level," he said.

Recession?

Investors have been worried about the prospect that the Federal Reserve's tightening could push the economy into a recession.

However, Thursday's report that second-quarter gross domestic product declined by 0.9% was taken in stride, in part because the market has been betting the Fed will have to slow down its hiking. The economy has now contracted two quarters in a row, and it is considered to be in what some economists say is a "technical recession." But most say it is not yet a real recession because of labor market strength and other factors.

The markets are focused on the potential for a bigger slowdown — particularly the bond market. In the past week, the closely watched 10-year yield fell to 2.64% from 2.75% the week earlier. Yields fall when prices rise, and the 10-year note was lifted by buyers who were concerned about economic weakness.

The 10-year's yield is important since mortgage rates and other business and consumer loans are influenced by it.

"The top tier U.S. data is important for this recession narrative. One thing that kicked off recession talk was the ISM services data, so ISM is going to be important," said NatWest's John Briggs. Services ISM slowed less than expected in June, but a measure of employment within the report fell to a two-year low.

The Institute of Supply Management's manufacturing survey is released on Monday, and the ISM services report is due out Wednesday.

Traders have been betting in the futures market that the Fed will have to start cutting rates next year, but the Fed's forecast does not show that. The Fed raised its target fed funds rate by 0.75% of a percentage point Wednesday, the second hike in a row of that size. The next rate hike, expected in September, could be smaller.

Briggs said the market's recession worries may be overdone.

"The jobs report has to be not bad. Powell called the labor market extremely tight, so I just think the market went a little bit overboard here," said Briggs, "Now it just needs to be not terrible."

The July employment report Friday morning is expected to show the economy added 250,000 jobs, according to Dow Jones. That is down from 372,000 jobs added in June.

"If the jobs report is bad, to me it's not more good news. ... If the jobs report is bad, it's more information we're just begging this recession rather than finishing this recession," said David Bianco, chief investment officer, Americas at DWS.

Bianco said he expects the economy is heading for a recession but because of inflation, not the Fed's rate hikes.

The big issue for the stock market is tech and how it's doing since it dominates the market, Bianco said.

Tech stocks were slammed by rising interest rates, as the 10-year yield climbed earlier in the year. Investors pay up for growth and tech stocks because of the promise of future earnings.

"People say if the 10-year is done going up, how bad are the technology earnings going to be?" said Bianco. "I caution with the idea that tech will be damaged by recession and a strong dollar and this [would be] from spending on the consumer side and the business side of technology. It's not that valuations are cheap. ... This may be a shallow recession, but I'm not convinced it's going to be a short one."

Bianco said he likes utilities, health care and aerospace and defense. "For those that want to take a cyclical risk, I like the big banks," he said. He said the banks do not have the balance sheet issues they had in the financial crisis.

"The overnight rate is going to be the driver of their net interest margins, especially at the big banks," he said. "Banks are in a better position than they normally are in a recession."

Week ahead calendar

Monday
Earnings: Activision Blizzard, Devon Energy, Zoom Info, Rambus, Vornado, Genworth Financial, Avis Budget, Aflac, CF Industries, Mosaic, Simon Property Group, Check Point Software, Loews, Jacobs Engineering, Lattice Semiconductor, Sanmina, DaVita

9:45 a.m. S&P Global manufacturing PMI
10:00 a.m. ISM manufacturing
10:00 a.m. Construction spending

Tuesday
Earnings: Caterpillar, BP, Dupont, Gilead Sciences, Uber, JetBlue, Marathon Petroleum, KKR, Molson Coors Brewing, Eaton, Oatly, S&P Global, Illinois Tool Works, Cummins, Expeditors, Ferrari, Caesars Entertainment, Starbucks, Airbnb, Advanced Micro Devices, PayPal, Owens-Illinois, Assurant, Occidental Petroleum, Chesapeake Energy, Owens-Illinois, Coterra Energy, KKR, Marriott

Vehicle sales

10:00 a.m. Chicago Fed President Charles Evans speaks
10:00 a.m. Housing vacancies
10:00 a.m. JOLTS
6:45 p.m. St. Louis Fed President James Bullard speaks

Wednesday
Earnings: Booking Holdings, eBay, CVS Health, Moderna, Dana, Scotts Miracle-Gro, Regeneron, Under Armour, Exelon, Yum Brands, Robinhood, Clorox, MGM Resorts, Allstate, Marathon Oil, Ethan Allen, Brink's, Sprouts Farmers Market, GoDaddy, Tupperware, New York Times, Lucid Group, Hostess Brands, iRobot, Valvoline, APA, Iamgold, Host Hotels, Copa Holdings, Nabors Industries, Kyndryl, Rent-A-Center

9:45 a.m. S&P Global services PMI
10:00 a.m. ISM Services
10:00 a.m. Factory orders

Thursday
Earnings: Eli Lilly, Amgen, Alibaba, Cigna, Air Products, Kellogg, Dropbox, Expedia, Ball Corp., Becton Dickinson, Edgewell Personal Care, Iron Mountain, Restaurant Brands, SeaWorld, Thomson Reuters, Gannett, ConocoPhillips, Intercontinental Exchange, Paramount Global, Shake Shack, Block, DoorDash, TripAdvisor, Lyft, Cushman and Wakefield, Nu Skin, Rocket Companies, Virgin Galactic, WW International, Zillow, Datadog, Zoetis, Duke Energy, Wayfair, Motorola Solutions, Twilio, Synaptics, AMC Entertainment, Skyworks Solutions, XPO Logistics, Suncor Energy, Carvana, Beyond Meat, Johnson Controls, Crocs

8:30 a.m. Initial jobless claims
8:30 a.m. International trade
12:00 p.m. Cleveland Fed President Loretta Mester speaks

Friday
Earnings: Allianz, WPP, Canopy Growth, Cinemark, AMC Networks, DraftKings, Fluor, Western Digital, Liberty Broadband, Fluor, Gogo

8:30 a.m. Employment report
3:00 p.m. Consumer credit report

Saturday
Earnings: Berkshire Hathaway

Source https://www.globalcourant.com/stocks-head-into-august-with-a-tailwind-as-investors-await-jobs-data-and-a-slew-of-earnings/?feed_id=4026&_unique_id=62e45b92a606c

Amazon (AMZN) Q2 2022 earnings

Amazon shares climbed more than 11% in extended trading on Thursday after the company reported better-than-expected second-quarter revenue and gave an optimistic outlook.

Here's how the company did:

• EPS: Loss of 20 cents
• Revenue: $121.23 billion vs. $119.09 billion expected, according to Refinitiv

Here's how other key Amazon segments did during the quarter:

• Amazon Web Services: $19.7 billion vs. $19.56 billion expected, according to StreetAccount
• Advertising: $8.76 billion vs. $8.65 billion expected, according to StreetAccount

Revenue growth of 7% in the second quarter topped estimates, bucking the trend among its Big Tech peers, which all reported disappointing results prior Thursday. Apple, along with Amazon, beat expectations.

Amazon said it expects to post third-quarter revenue between $125 billion and $130 billion, representing growth of 13% to 17%. Analysts were expecting sales of $126.4 billion, according to Refinitiv.

Amazon has been contending with higher costs, as pandemic-driven expansion left the company with too many workers and too much warehouse capacity.

"Despite continued inflationary pressures in fuel, energy, and transportation costs, we're making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network," CEO Andy Jassy said in a statement.

Amazon shaved its headcount by 99,000 people to 1.52 million employees as of the end of the second quarter after almost doubling in size during the pandemic.

Amazon recorded a $3.9 billion loss on its Rivian investment after shares of the electric vehicle maker plunged 49% in the second quarter. That brings its total loss on the investment this year to $11.5 billion.

Because of the Rivian writedown, Amazon had an overall loss of $2 billion in the quarter. Analysts' EPS estimates varied dramatically, making it difficult to compare actual results to a consensus number.

Rivian CEO RJ Scaringe and Udit Madan stand in front of the new Amazon EV van powered by Rivian. Amazon and Rivian unveil their final custom Electric Delivery Vehicles (EDV) to begin using them for customer deliveries, in Chicago, Illinois, July 21, 2022.

Jim Vondruska | Reuters

Amazon's core e-commerce business continues to suffer as online sales are no longer flourishing like they were at the height of the Covid-19 shutdown. The company's online stores segment declined 4% year over year. Physical store sales continued to rebound from the year-ago period, growing 12%.

Amazon's ad business is a bright spot in an otherwise gloomy quarter for online advertising, and shows the company is picking up share in one of its fastest-growing businesses.

Ad revenue climbed 18% in the period. Facebook, meanwhile, recorded its first ever drop in revenue and forecast another decline for the third quarter. At Alphabet, advertising growth slowed to 12%, and YouTube showed a dramatic deceleration to 4.8% from 84% a year earlier.

Among the other top tech companies, Microsoft also reported disappointing results this week. Apple beat on the top and bottom lines, lifting the stock in after-hours trading.

Amazon's cloud segment continues to hum along. Sales at Amazon Web Services jumped 33% from a year earlier to $19.74 billion, above the $19.56 billion projected by Wall Street.

Operating income, which excludes the investment-related loss, shrank to $3.3 billion from $7.7 billion a year earlier. AWS generated operating income of $5.7 billion, accounting for all of Amazon's profit plus some in the period.

The upbeat results could also help improve the mood around Jassy, who replaced Jeff Bezos as CEO a little over a year ago. Jassy's first year on the job has been marred by challenges, including an ongoing labor battle, the market downturn, growing regulatory pressure and an exodus of top talent.

He's also under pressure to show he can return Amazon's core retail business to the growth investors have become accustomed to seeing, a difficult task given the macro pressures the company faces, such as soaring inflation and slowing consumer discretionary spending.

WATCH: The first look at Amazon and Rivian's electric delivery vans

Source https://www.globalcourant.com/amazon-amzn-q2-2022-earnings/?feed_id=3550&_unique_id=62e30440daefe

Apple Q3 2022 earnings preview: Macroeconomic concerns dominate

Tim Cook, chief executive officer of Apple Inc., speaks during the Apple Worldwide Developers Conference at Apple Park campus in Cupertino, California, US, on Monday, June 6, 2022.

David Paul Morris | Bloomberg | Getty Images

Apple reports earnings on Thursday for the quarter ended in June.

The third quarter of Apple's fiscal year is typically the company's smallest by sales. The quarter is in the back half of the iPhone's annual refresh cycle as investors start to look forward to the release of a new model, which boosts sales starting in late September or October.

This year, analysts and investors will be closely watching Apple's earnings in the face of many new macroeconomic trends, including declining consumer confidence, rising interest rates, and decades-high inflation.

So far, Apple's sales have remained strong, partially because its customers are a fairly well-off group/ But any signs that people are putting off Mac and iPhone purchases because of inflation or recession fears could have implications for the whole economy.

Apple also has significant exposure to China, both as a market to sell its products and as the country where most of its products are assembled. Several Apple factories in China had production shifted or suspended at times during the June quarter because of Covid lockdowns.

Analysts polled by FactSet expect Apple to report $82.8 billion in sales, which would be under 2% growth from the same quarter last year and the slowest growth quarter since the start of the pandemic.

Analysts are also expecting $1.16 in earnings per share, which would be a 10.7% decline on an annual basis. Gross margin will also decline from 43.7% last quarter — high for Apple historically — to between 42% and 43%, the company said in April.

Supply issues and China lockdowns

In April, the story for Apple wasn't about demand: it was about supply. "Right now, our main focus, frankly speaking, is on the supply side," Apple CEO Tim Cook told analysts.

Apple warned of a $4 billion to $8 billion revenue hit stemming from supply issues, including chip shortages and production snags. Some analysts say that Apple will signal that it managed the supply chain well and the revenue hit will end up on the low-end of Apple's guide.

"We believe the company has managed its supply chain better than it planned a quarter ago, while it continued to gain share in an otherwise difficult quarter for smartphones and PCs," Deutsche Bank analyst Sidney Ho wrote in a recent note.

That could be good for iPad sales, which have taken a hit in the past few quarters as Apple prioritized parts for iPhones and other products.

"We also anticipate improving iPad sales in part due to improving supply and believe Apple's $4 billion to $8 billion supply headwind commentary for the June quarter was more likely at the lower-end of this range," Canaccord Genuity analyst T. Michael Walkley wrote in a note this month.

Apple has grappled with shutdowns in urban China, including in Shanghai. Covid restrictions could have hurt Apple's iPhone sales in China early in the quarter, but could have charged sales in June as people left lockdown ready to spend.

Analysts polled by FactSet predict that Apple's Greater China sales will be around $13.79 billion, which would be a decline from the $14.56 billion in sales from a year ago.

September quarter demand

Investors will also be listening closely to see if Apple is signaling consumer weakness in any regions around the world.

"We believe outlook/demand commentary will be the key focus as we try to gauge the impact to Apple's earnings in the event of a slowing consumer/macro environment," Wells Fargo analyst Aaron Rakers said in a note.

Smartphone and PC sales have been slowing, but Apple has been less affected because the high-end market, where it sells, has been more resilient. TSMC, Apple's main supplier of processors, warned demand for PCs, smartphones, and consumer electronics is trending weaker.

If Apple signals that demand is slowing, it would be another signal of a potential recession.

Goldman Sachs' Rod Hall believes "high end demand may be beginning to weaken in Europe driven by high inflation and falling consumer confidence."

Apple has not announced a slowdown in hiring or other cost controls, unlike Alphabet, Tesla, Microsoft, and Meta. But Apple is quietly slowing its pace of hiring, according to Bloomberg News, and some analysts believe that company management could talk about its strategy to control expenses.

Apple hasn't provided guidance since the start of the pandemic, citing uncertainty, and some expect this trend to continue.

"While we don't expect Apple to guide F4Q22, the company is likely to provide qualitative commentary as it has done for several quarters," Rakers wrote.

Can Apple remain a safe haven?

Overall, analysts are still confident in Apple as an efficient company with a strong cash balance, loyal customers, and competitive products.

But can Apple remain a safe haven as other tech stocks drop and the markets recede? Apple is down nearly 15% so far in 2022, but that's better than the Nasdaq, which is down 18%.

"Apple remains a best of breed consumer electronics company able to invest through cycles, and with 60%+ of revenue more staples-like in nature, strong brand loyalty, and continued product/services innovation, we believe it is better insulated relative to peers during a downturn," Morgan Stanley's Huberty wrote.

One key for Apple investors in a downturn will be the growth of its services businesses, which makes overall hardware sales growth less crucial. Apple services, which include monthly subscriptions, payment fees, warranties, search licensing fees from Google, and revenue from the iPhone App Store, also offer higher margins than its core hardware business.

Apple's services business is predicted to be up 12% on an annual basis, according to analysts surveyed by FactSet.

That's a slower growth rate than the 17% annualized growth it posted in its second quarter, and a significant decline from the 27% growth Apple posted in its services business in 2021.

JP Morgan's Samik Chatterjee believes that Apple's plan to buy back shares will buoy the stock, even if its earnings underwhelm. Apple's board authorized $90 billion in additional share buybacks and dividends in April.

"We believe the resilience of the earnings estimates in the backdrop of macro deterioration, including both inflation and adverse FX, will continue to drive investors to prefer Apple with strong cash generation and balance sheet that will allow it to offset any earnings dilution on account of the macro through buybacks," Chatterjee wrote in a note.

Source https://www.globalcourant.com/apple-q3-2022-earnings-preview-macroeconomic-concerns-dominate/?feed_id=2486&_unique_id=62e033a980637