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Apple and Amazon Come Down to Earth

The supply-chain crisis is driving a wedge through big tech.

Earlier this week, Microsoft Corp. and Google-parent Alphabet Inc. posted robust earnings results, as their software and internet-focused business models allowed them to avoid much of the supply-chain headwinds affecting other industries.But on Thursday, Apple Inc. and Inc., showed how vulnerable they were to the supply-chain mess. And it doesn’t look like conditions will improve anytime soon.

Let’s look at the numbers. Apple Inc. reported revenue of $83.4 billion in the three months ended in September, up 29% from a year earlier, missing the $84.7 billion consensus estimate of analysts surveyed by Bloomberg. Inc. generated sales of $110.8 billion in the period, an increase of 15% from last year that also came in below the $111.8 billion median forecast.

The outlook for the holiday quarter was even more disappointing. Amazon gave a revenue growth forecast of 4% to 12%, lower than the 13% analysts’ estimate for its current quarter. In the earnings news release, Chief Executive Officer Andy Jassy said labor shortages and supply chain issues would continue to be significant factors in the current quarter ending in December.

Likewise, Apple CEO Tim Cook warned that supply constraints driven by chip shortages would worsen in the December period. Shares of Apple and Amazon fell about 4% in after-hours trading.

The fact is Apple and Amazon have large businesses that require massive scale in manufacturing physical merchandise and delivery logistics. That makes both companies vulnerable to the woes of the current environment: production bottlenecks, along with raw material and labor shortages.

Apple is facing other manufacturing issues. According to a recent Bank of America report, 14% or more of Apple’s global supplier factories are likely to suffer from China’s electricity power rationing through early next year.

The other looming issue for investors is the companies’ decelerating growth rates. Over the last year, Amazon benefited tremendously from the shift to online shopping during the pandemic. But now the trend is reversing, with consumers returning to brick-and-mortar stores as the economy re-opens, meaning e-commerce revenue will likely be slow for a few more quarters.

Apple, too, faces difficult growth comparisons. Sales for the first 5G-enabled iPhone drove 30%-plus sales growth for the company in fiscal 2021. It’s a performance that won’t be repeated, as the new iPhone 13’s minor incremental improvements give current owners little reason to upgrade.

The companies’ stock valuations leave little room for error. Apple’s $2.5 trillion market value comes with heady expectations. It trades at 27 times next fiscal year’s consensus earnings, but is only expected to grow its sales at 4% in the period. Amazon is far from cheap, either, at 53 times 2022 profit estimates with projected revenue growth of 18% for the period — a forecast that is likely to come down after today’s report. For context, the Nasdaq 100 index trades at 27 times 2022 earnings with expected sales growth of more than 10%.

History shows slowing growth along with high valuations is not a good mix.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron’s, following an earlier career as an equity analyst.

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