Microchip shortages, soaring staff and shipping costs combine for bleak holidays run-in
Thursday 04 Nov 2021 Author: Steven Frazer

Supply chain woes and rising costs have put investors on alert for a Christmas run-in revenue squeeze for two of the world’s biggest companies.

Microchip shortages cost Apple $6 billion in sales in its fiscal fourth quarter to 30 September 2021, which missed Wall Street expectations, and chief executive Tim Cook has warned that the impact will be even worse during the current holiday sales quarter.

Amazon’s problems were concentrated in higher input costs as it grapples with staff shortages, higher wages, global supply chain issues and costlier freight and shipping costs. This hurt profit margins in the firm’s large online marketplace business as the company forecast a $4 billion rise in costs to meet demand in the fourth quarter.

The holiday period is a big deal for sales of both companies as consumers around the world get into the seasonal present buying mood, but the impact on profits could be particularly acute. Apple earned more than 45% of its annual earnings during the October to December quarter from around 38% of revenue as high-margin iPhones were again a popular gift with consumers.

Chief executive Tim Cook said the company expects year-over-growth for its quarter ending in December, analysts expect revenue growth of 7.4% to $119.7 billion.

Andy Jassy, who took over from Amazon founder Jeff Bezos as chief executive in the summer, indicated that sales could touch $130 billion or $140 billion but operating profit would hit not more than $3 billion this quarter. That would be less than half the 2020 October to December quarter’s $6.9 billion.

Amazon’s net sales in the third quarter rose 15% to $110.8 billion but net profit of $3.2 billion was about half of 2020’s equivalent. Both fell short of estimates although its cloud computing arm, Amazon Web Services, the highly profitable part of the business which competes with other giants like Microsoft and Alphabet, saw sales jump 39% to $16.11 billion.

Both Apple and Amazon shares reversed sharply in the wake of the September quarter forecast misses and bleak holiday run-in projections. Amazon and Apple stocks were trading at $3,318.11 and $148.96 respectively as of Wall Street’s close on 1 November, marking a year to date performance of 4% and 15% respectively.

Notably one long-term Amazon-sceptic demonstrated his faith in the business as star fund manager Terry Smith finally added the company to the Fundsmith Equity (B41YBW7) portfolio.

He was on record as being a fan of AWS if not the lower margin online retail business, and his decision to buy for his flagship fund perhaps reflects the former’s growing contribution to the group.

Smith had arguably already dipped his toe in the water. In August 2021 Amazon was added to the Fundsmith Long/Short hedge fund which was set up to manage his personal fortune.

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