Apple Stock Is Under Pressure. There’s a Silver Lining. - Barron's

Apple delivered another stunning quarter, crushing earnings estimates across the board. Apple registered nearly $40 billion of iPhone sales in its fiscal third quarter, beating Wall Street expectations by an eye-watering $5 billion.

Yet the euphoria quickly turned to disappointment for investors as Chief Financial Officer Luca Maestri said revenue growth would slow in the September quarter. The “very strong double-digit” growth, Maestri said, won’t match the 36% growth in the June quarter.

A less favorable foreign exchange impact, normalizing services growth, and supply constraints from the global chip shortage were the culprits, Apple’s finance chief said. The stock took a few bumps in after-hours trading on Wednesday as investors digested those comments.

Renowned Wedbush tech analyst Dan Ives sees it differently and said Apple’s “drop the mic” quarter was the next step in driving the stock to a $3 trillion market cap. China was the star of the show, he said, where sales grew 58% in a region key to the Apple bull thesis. The impact of the chip shortage was neutralized by iPhone and services strength, he added.

But it’s the 5G supercycle that could be key to the continuing demand story. A significant proportion of iPhone users have not upgraded their phones in recent years, and the iPhone 13 isn’t far away.

While Apple’s supply warning must not be ignored, it’s worth remembering that the company warned in April that it could take a $3 billion to $4 billion hit from the semiconductor crisis in the third quarter. Look how that turned out.

—Callum Keown

*** Join Barron’s senior managing editor Lauren R. Rublin and deputy editor Alex Eule Thursday at noon to discuss the outlook for tech companies and individual stocks. Sign up here.

***

Big Tech Earnings Trounce Wall Street Estimates

The first leg of big tech earnings are in. Apple, Google’s parent Alphabet and Microsoft all crushed expectations.

From iPhones and iPads to Macs, Apple’s results beat estimates in every product category, while earnings of $1.30 a share sailed over consensus estimates at $1. The company’s increasingly important services business jumped 33% to $17.5 billion.
Alphabet finance chief Ruth Porat pointed to elevated consumer online activity and strength in advertiser spending that helped drive a blowout quarter. Net income of $18.5 billion, or $27.26 a share, soared past analyst estimates of $19.35 a share.
Microsoft’s sales jumped 21% year-over-year to $46.2 billion, while earnings hit $2.17 a share. The company’s cloud computing sales, which include Azure, grew 30% to $17.4 billion.

What’s Next: The impressive results are a positive sign for Facebook and Amazon.com when they report results on Wednesday and Thursday, respectively.

—Connor Smith

***

Vaccinated Americans Should Resume Wearing Masks Indoors, CDC Says

The Centers for Disease Control and Prevention, reversing prior guidelines, now recommends that everyone resumes wearing masks indoors in areas of the U.S. with high Covid-19 transmission rates, including universal masking in K-12 schools, regardless of an individual’s vaccination status.

CDC Director Dr. Rochelle Walensky said the update was necessary because on rare occasions, some vaccinated people infected with the Delta variant of the coronavirus that causes Covid-19 could spread the virus to others.
President Joe Biden is considering requiring federal employees to be vaccinated against Covid or submit to testing, masking, and other restrictions, media reports said. Biden said Tuesday that getting vaccines and wearing masks help “avoid the kind of lockdowns, shutdowns, school closures, and disruptions we faced in 2020.”
The average number of daily cases has jumped 144% in the past two weeks, per the New York Times. Cases are rising in Florida, Louisiana, Missouri and Alabama, where less than half of residents are fully vaccinated.
The U.S. reported 89,418 new cases on Monday, according to Johns Hopkins University. As of Tuesday, 163.3 million Americans are fully vaccinated, or 49.2% of the total population, according to the CDC.

What’s Next: The International Monetary Fund on Tuesday raised its economic outlook for the U.S. and the U.K., both projected to grow 7% this year, but lowered it to 6.3% for developing economies like India that are struggling with Covid surges and access to vaccines.

—Janet H. Cho

***

All Eyes on Federal Reserve as It Wraps Up Its Meeting

The Federal Reserve will conclude its latest two-day policy meeting today, but investors might not get concrete answers about when the central bank will start to reduce its monthly bond purchases to take some of the steam out of the economy.

The fast spread of the Delta variant in recent weeks, and the surge in new infections, has fanned fears about a disruption to global economic growth, which could take some of the pressure off the Fed to clarify its plans, economists told MarketWatch.
“The drumbeat [for the Fed] to provide hard evidence they are on the way to slowing asset purchases will be a little less intense,” said Vince Reinhart, Mellon’s chief economist, in an interview with MarketWatch.
The Fed has been buying $120 billion of bonds monthly since last summer and said in December it wouldn’t take its foot off the brake until “substantial” progress in its twin goals of achieving a healthy labor market and stable 2% inflation.
Some want to know when the Fed will back off its monthly buying of $40 billion in mortgage securities given a red-hot housing market that has seen sales prices for existing homes soar 23% amid material, land and labor shortages in the construction industry.

What’s Next: The earliest Federal Reserve Chair Jerome Powell might substantively address bond purchase tapering is the Fed’s annual meeting in Jackson Hole, Wyo., in late August, some economists said, but others are expecting it closer to the Fed’s September meeting.

—Liz Moyer

***

Air Travel Has Recovered More Quickly Than Expected, Despite Challenges

JetBlue Airways CEO Robin Hayes told investors on Tuesday that air travel has recovered “more quickly than we expected,” with widespread vaccinations encouraging more people to fly, and a boost in corporate customers in New York and Boston from an alliance with American Airlines.

JetBlue posted a second-quarter profit of $64 million, swinging from a net loss of $320 million in the same period last year. Hayes acknowledged “cost headwinds” in the near term, including maintenance, rents, landing fees, and the pressure of getting back to normal. JetBlue shares dropped 6.9% on Tuesday.
American Airlines asked its pilots to save fuel when possible, warning them about fuel delivery delays at certain airports that could last through mid-August. Jet fuel shortages at some western U.S. airports resulted from a lack of truck drivers, logistical issues and insufficient supplies.
The airline industry is coping with labor shortages, volatile weather, and surging jet fuel prices, which meant Southwest Airlines missed its second-quarter earnings targets. Airlines are also competing for fuel with planes dropping water and fire retardant on raging wildfires.
The White House said Monday that the U.S. won’t lift its restrictions on nonessential international travel, citing concerns over the highly transmissible Delta variant and rising coronavirus cases.

What’s Next: General Electric CEO Larry Culp told CNBC on Tuesday he is optimistic and confident about its aviation business and believes global air travel will continue to recover. “It looks like the leisure traveler is back and business travelers are not that far behind, hopefully,” he said.

—Janet H. Cho

***

Quarantine-Free Travel From New York to London Is on the Horizon

The air link between New York and London—critical for tourism and business travel alike—may soon return in force. Prime Minister Boris Johnson’s government could allow fully vaccinated travelers from the U.S. and European Union to cross the border without quarantining as soon as next week, according to reports.

But easing restrictions for American travelers could be a one-way ticket. The CDC last week issued its highest level of warning against travel to the U.K. amid a new peak in Covid-19 cases. Infections have since dropped, but the White House affirmed on Tuesday that it wouldn’t ease strict border controls for non-Americans.
The inclination from the U.K. to loosen rules comes amid an expected boom in European travel. Budget airline Wizz Air on Wednesday said it expected to operate around 90% to 100% of 2019 capacity in July and August, marking a full recovery to precoronavirus capacity.
Sentiment on European airlines has lifted off following the news, with shares in IAG —which owns British Airways and other carriers—up 4% while Wizz Air stock rose 5%. The sector was smashed by the lack of travel through the pandemic, and has largely yet to recover. IAG, Wizz Air, and Ryanair are all attractive investment opportunities, Barron’s has reported.

What’s Next: Reopening the New York to London corridor doesn’t mark a full return to trans-Atlantic travel, especially as London to New York remains troubled by U.S. border rules. But it has boosted sentiment among carriers and travelers amid hopes that the recovery is on the right flight path.

—Jack Denton

***

Dear Quentin,

I am a 40-year-old woman with a 14-year-old child. I am happily “common-law” married to my man of steel for almost six years now.

He’s 18 years older and he’s a wonderful man. He has provided a house for me and my daughter, and purchased a new vehicle for me. This one has air conditioning!

I was working at a grocery store and living with my mother when we met. He was ending his 30-year miserable marriage during our first year together. Meanwhile, he also has paid for many things for me.

I’ve had some pretty extensive dental work throughout the years, and he even funded a trip for me and my daughter alone to go to New York.

I always intended to pay him back with my tax refund, but it never came. He paid for the attorney I needed to acquire child support and full custody of my daughter.

I don’t really have anything to my name to speak of—except the $600 a month I get for child support. That mostly pays for my daughter’s braces and a dermatologist.

I was in an 18-wheeler accident about a year and a half ago. The time for settlement is drawing near, and the expected settlement will be worth anywhere up to $800,000.

This is more money than I’ve ever seen in my life. It scares me. While I plan on having major dental work again, that is really the only thing I have committed to using my settlement money.

I want to pay my partner back. But I also would like to remodel and update our house. Of course, it’s his house and he paid cash for it so there is no monthly mortgage.

In four years, once my daughter graduates high school, I dream of selling this house and building my dream house in the country.

I’m at a crossroads as to what to do with this settlement money, so it will last. I would like to pay for college for my daughter, and also make a wise investment in our current and future homes.

—Unsettled in Texas

Read The Moneyist’s response here.

—Quentin Fottrell