Tom Forte, D.A. Davidson managing director and senior research analyst, joins Yahoo Finance Live to discuss Apple and Amazon earnings.
Video Transcript
BRAD SMITH: Apple just reported second quarter earnings. And the company, we should say, is actually moving higher here in after hours trading. It’s up by about 3 points, just about 1.9% as of right now. Amazon, we’ll also get into that. That’s trading lower here after their report dropped. We’ve got Tom Forte who is the D.A Davidson managing director and senior research analyst here with us now. Tom, great to speak with you as always.
First, just want to get your headline reaction to Apple as that is moving higher here in after hours trading on its most recent, we should say, fiscal Q2 earnings.
TOM FORTE: Yep, so initial reaction on Apple is that we were too concerned about supply chain challenges. The $6 billion hit they took in the December quarter was much lower in the March quarter. So we were concerned. As it turns out, we were too concerned. Better than expected results from Apple.
RACHELLE AKUFFO: And so when you look at how the other FANG stocks have performed this earnings season, how do you think Apple will, and perhaps as we also saw with Microsoft, were able to better weather the storm?
TOM FORTE: It’s a great question. And I think Tim Cook obviously deserves a lot of credit for his ability to manage supply chain challenges, especially with the more recent shutdowns in China. If you think about the FANG stocks in general, you have a mixed bag. You have OTT stocks under pressure as reflected by Netflix. And then you have kind of a mixed story on digital advertising with Google not doing very well and Facebook slash Meta outperforming its expectations. Perhaps expectations were too low for that one.
DAVE BRIGGS: I want to get to Amazon in a sec. But 97 billion in revenue, third best quarter ever. I do point to those supply chain issues. How they navigated them seems a mystery. Is it about to get a lot worse given what we’re seeing in China right now?
TOM FORTE: I mean, it potentially could get worse. But I think to put it into context, the December quarter on a number, sheer amount of sales, is a bigger quarter for Apple than the March quarter. So there was a realistic expectation that the 6 billion in lost revenue would be less lost revenue in the March quarter. Now, we look for additional details on the earnings call to see if the June quarter is worse off than the March quarter.
BRAD SMITH: I mean, just looking at these services, because it was a record quarter for services at the end of the day, this is what really makes the Apple ecosystem as sticky as it does. And for that, we saw the revenue come in at $19.8 billion in this most recent quarter. Once again, I mean, just a record and really a stamp on what they’ve continued to invest in in the number of consumers across the products that they do have. However, where are we going to need to see some more product innovation in order to keep these services environment as sticky as it is right now?
TOM FORTE: Great question and great point. So the way I think about it is the next step for Apple is Apple as a subscription. So full on giving a consumer an opportunity to pay Apple a monthly bill, not unlike what you do with your cable bill, for a combination of hardware and services.
And if you look at and you compare where they are with Apple T– sorry, Apple TV Plus, they’re a subscription video on demand offering, and where Netflix is, and “CODA” winning Best Picture, and thing of that nature, this is clearly a growth opportunity for Apple. But I’m expecting them at some point to offer Apple as a subscription, hardware and software services, which I think will drive services revenue higher.
RACHELLE AKUFFO: [INAUDIBLE] we obviously see a different story for Amazon here. As we pass through their earnings, what really stood out to you in terms of the opportunities that Amazon has and really the challenges you see it having?
TOM FORTE: Excellent question there. So we just wrote our 22nd white paper on the convergence of the technology and retail sectors. It was on inflation. It was called, “Dude Where’s My Dollar?” And what we talked about is labor pressure for blue collar, so at the warehouse level for Amazon, and then labor pressure at white collar. Think software engineers. And for Amazon, they’re getting hit on both ends, with labor inflation, blue collar, and labor inflation, white collar.
So the cost environment for Amazon is very difficult. It adjusted well, their advertising came in a little lower than expected. But that’s high margin. That’s good news. But really, the challenge for Amazon in the March quarter, June quarter, is managing expenses including at the labor level.
DAVE BRIGGS: And how heavy will that Rivian loss weigh on Amazon? And I assume you’re referencing the unionization effort. How much do you have to factor that in down the road?
TOM FORTE: Great question. And we’re working on what would be our 23rd white paper on tech and talent and diving into unionization. My initial thesis is that Amazon will need more employees to do the same amount of labor. But as I learn more about unionization in general, I think it could work in their favor to the extent that turnover might be lower at the warehouse center level. So I know the initial headlines are all negative. I’m still doing the analysis, working on our next white paper.
But I’m monitoring closely the emergence of unionization. You think Amazon, Starbucks, there’s talk of unionizing sellers on Etsy. So it’s clearly an emerging trend that we’re following in the tech space.
BRAD SMITH: To what extent does robotics factor into that? I mean, we’re talking about fulfillment centers that are heavily robotized as well.
TOM FORTE: So there’s two schools of thought. So My school of thought at this point is that in the future, when you go to McDonald’s, there will be no cashiers. When you go into a warehouse center, there will be more automation, less humans. But there are some others who I talked to who feel like the level of automation right now at the warehouse center level, in particular for Amazon, has peaked, and that Amazon will get a better return on human labor than additional automation.
So again, very important question, something I’m looking at. And I think it isn’t clear at this point in time that they could just lean into automation and bust the unions, and lower their expenses in that manner.
RACHELLE AKUFFO: And as we look at the different areas that Amazon is trying to grow into, we’re seeing what it’s doing with health care. We’re seeing now that it’s allowing some of this direct to consumer purchasing in terms of what we see with Amazon as well. Just how far is Amazon going? And is that going to be enough to really offset some of the concerns that investors have about where Amazon is headed long term?
TOM FORTE: Yep. So at a general level, to get one more basis point of revenue growth, or one more percentage point I should say, they need about 3.9 billion of incremental sales. Health care has that kind of potential to be a needle mover for Amazon. So I do look at their efforts in health care. And it could be something that could drive sustained growth in the stock. But in general, Amazon needs to enter new markets and new markets that are very big to move the needle on top line.
BRAD SMITH: Tom, always great to get your insights. And thanks for helping us break down these earnings reports that have come through after hours. We’ll keep a close eye on shares of AMZN and AAPL. Tom Forte, who is the D.A Davidson managing director and senior research analyst joining us here.
