Melius' Ben Reitzes looks ahead to Apple earnings

Magnificent Seven: Apple & Amazon - Tariff Implications

Key Concepts:

• Tariffs and their impact on profit margins.
• Supply chain adjustments (e.g., moving production to India).
• Product margins and their effect on Earnings Per Share (EPS).
• Mix shift towards services (Apple).
• AWS (Amazon Web Services) as a profit offset.
• Third-party sellers on Amazon's platform.

Apple: Tariff Impact on Margins and Supply Chain

• Main Concern: The primary concern revolves around the potential impact of tariffs on Apple's profit margins, especially on high-priced items.
• Black Box: The exact impact is described as a "black box" due to the difficulty in determining how much Apple will raise prices versus how much they will absorb the tariff costs.
• Supply Chain Adjustment: A key factor is Apple's ability to adjust its supply chain, particularly by moving production to India. The reported figure of 60 million units out of India within a year or two is mentioned, but the exact timeline and impact remain uncertain.
• Guidance Needed: Investors need clear guidance from Apple regarding product margins. Every point in product margins can affect EPS by up to $0.20, potentially impacting earnings by around 15%.
• Near-Term vs. Long-Term: Melius Research has near-term numbers below the street, anticipating a hit to margins. However, they remain optimistic about Apple's long-term prospects, expecting the tariff issues to be resolved within a year.
• Market Share vs. Price Hikes: The analysis suggests that Apple might be hesitant to significantly raise prices to avoid sacrificing market share.
• Margin Trajectory: Before the tariff concerns, Apple's margins were on a positive trajectory due to the increasing mix shift towards services. The expectation is that margins will dip to the mid-40s or even lower in the near term before recovering once the tariff situation is resolved.
• Quote: "Its margins? John, if tariffs have any impact on margin, we got to hear about it." - Ben Reitzes, emphasizing the importance of margin guidance from Apple.

Amazon: AWS as a Profit Offset and Retail Considerations

• Focus on AWS: While the retail e-commerce business is relevant due to tariff implications, the analysis emphasizes a laser focus on Amazon Web Services (AWS).
• AWS as a Buffer: AWS, with potentially less direct tariff exposure (except perhaps on server costs), is seen as a crucial division to offset any negative impacts from tariffs on the retail side.
• Limited Cloud Upside: The research firm isn't expecting significant upside from cloud for either Google or Amazon.
• Retail Tariff Impact: The impact of tariffs on Amazon's retail division, particularly concerning third-party sellers, is acknowledged as a key area of interest for investors and the media.
• Shein and Temu: The potential impact of tariffs on competitors like Shein and Temu is mentioned, suggesting a possible benefit for Amazon.
• Third-Party Seller Volume: A potential downside is the possibility of reduced volume from third-party sellers due to tariffs, which could negatively affect Amazon's overall performance.

Synthesis/Conclusion

The key takeaway is that tariffs pose a significant challenge to the profit margins of both Apple and Amazon. For Apple, the focus is on understanding the extent of the margin impact and the effectiveness of supply chain adjustments. For Amazon, the emphasis is on AWS's ability to offset potential losses in the retail sector due to tariffs. Investors need to closely monitor company guidance and developments in supply chain strategies to assess the long-term impact of these tariffs.