Author: Don Obrien

Apple finally hit by supply chain shortage as Microsoft takes over as most valuable company

Apple (AAPL) is no longer the most valuable publicly traded company in the world. After a disappointing earnings report marred by the impact of the global chip shortage, Apple’s stock fell more than 2% Friday, putting it $10 billion behind the new top dog, longtime nemesis Microsoft (MSFT).

Yes, Microsoft is still a massive player in the PC space. And that sector has been hurt by the shortage. But investors see the company more as a cloud play. And that segment has been growing at a rapid pace for the company. For Microsoft’s fiscal Q1, which it reported Tuesday, cloud revenue was up 36% year-over-year.

Apple, meanwhile, is a hardware company, making it especially susceptible to the chip shortage, which knocked out billions in potential revenue in its Q4 earnings. And CEO Tim Cook only expects it to get worse.

“We estimate these constraints had around a $6 billion revenue dollar impact driven primarily by industry wide silicone shortages, and COVID related manufacturing disruptions,” Cook said during the company’s earnings report.

“We believe that by the time we finish the quarter, that the constraints will be larger than the $6 billion that we experienced in Q4,” Cook said.

Apple CEO Tim Cook speaks during an Apple launch event in the Brooklyn borough of New York, U.S., October 30, 2018. REUTERS/Shannon Stapleton

Apple CEO Tim Cook speaks during an Apple launch event in the Brooklyn borough of New York, U.S., October 30, 2018. REUTERS/Shannon Stapleton

It’s not as though consumers aren’t spending, though. The company’s Services segment, which isn’t impacted by the chip shortage, cruised past analysts’ expectations, bringing in $18.28 billion for the quarter. Analysts also say demand for Apple products is there.

“We estimate that overall demand has been robust globally as discussed by Cook last night on the call and Apple will be clearly running into a major iPhone 13 unit shortage for holiday season if consumer demand keeps up at this pace,” Wedbush analyst Dan Ives wrote in a note following Apple’s earnings call.

Oppenheimer’s Martin Yang offered a similar assessment, pointing out that Apple’s install base and paid subscription count hit all-time highs. In fact, Cook disclosed that the company now has 745 million paid subscribers across its various product lines including Apple Music, AppleCare, Apple TV+, and iCloud.

Cook also told analysts that the company isn’t struggling with its high-end custom chips — the ones that power the iPhone, Mac, and iPad — but rather older chips that run secondary systems in Apple’s products.

That’s been an ongoing theme throughout the chip shortage. Chip producers are still getting out orders of the latest, cutting edge microprocessors, since they provide greater margins for chip manufacturers. Legacy chips, though, are in shorter supply, and Apple needs to compete with other firms for access to them.

The supply chain issues, however, may not be the most important aspect of Apple’s business. According to Neuberger Berman managing director Dan Flax, it’s how Apple is able to continue innovating.

“Their track record to-date including with the recent announcements around the Mac the other day with the new silicon suggests that they can [innovate],” Flax told Yahoo Finance Live.

“And so the innovation, the execution on the product cycles even in the face of these supply chain shortages, clearly difficult [comparisons] over the next year, if they can do that, I think this company can create additional shareholder value over the next one to two years,” he added.

Despite falling from the top spot, Apple is still one of the most valuable companies in the world. And if demand for its products stays strong, and let’s face it, it likely will, the tech giant could soon trade places with Microsoft again, and regain its post. As long as it has the chips to do it.

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Oliver Bolt

Oliver Bolt

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