Apple kicked in the New Year by revealing that sales of the company’s flagship iPhone are slowing, resulting in the company revising its first quarter 2019 revenue guidance to $84 billion instead of the $89 billion and $93 billion it projected just a few months ago.
In a letter to investors published Wednesday, Apple CEO Tim Cook pointed to two problems in particular that led to the sudden move: Economic weakness in emerging markets that impacted Apple more than it expected, and fewer iPhone upgrades that the company also failed to anticipate.
Wall Street did not take kindly to the news with Apple’s shares tumbling 8% in after-hours trading to $145.15 a share after a momentary halt.
Apple tried to soften the blow on Thursday by saying that spending in the company’s app store hit a record high of more than $1.22 billion during the recent holiday season, but it wasn’t enough to soothe worried investors. Apple shares are down 9.27% in midday trading on Wednesday at $143.28.
Here’s what some Apple analysts are saying about the company’s iPhone woes, particularly in China:
Toni Sacconaghi of Bernstein Research highlighted in an analyst note that Apple did not outright attribute the slowdown of it’s iPhone sales to the smartphones’ high price tags. Apple has been steadily raising the price of its newest and most powerful iPhones each year, with some models now topping $1,000.
Sacconaghi acknowledged that “a meaningful portion of the China weakness is macro driven,” which means there are circumstances beyond Apple’s control. But, he noted that Apple “appears to have lost material share in China in Q4 despite its new product launch, and that Apple has struggled in China before, underscoring the fickleness and lower lock-in of Chinese consumers.”
Indeed, Apple faces several tough Chinese competitors like Huawei and Xiaomi that are now selling cheaper smartphones that are increasingly popular in China, as research firms like IDC have previously reported.
From Sacconaghi:
Perhaps in part because there are no easy fixes, Apple failed to acknowledge the possibility that current iPhone prices are simply too high (stunningly, we note that iPhones prices are nearly 5x higher than the average non-Apple smartphone sold globally). Moreover, we believe that the high-end smartphone market is fully mature with *structurally* elongating replacement cycles, which we maintain is the company’s key long-term challenge.
Meanwhile, UBS analysts appear more confident that Apple’s growing services business, which includes app store and iCloud storage, could help the company make up for slower iPhone sales. These analysts said in a research note that services represent a huge business opportunity for Apple. While the analysts acknowledged that slower iPhone sales “ultimately presents services headwinds,” meaning there’s a chance the services business could potentially take a hit along with the iPhone business, there’s still a “has huge untapped services rev pool.”
Macquarie Research analysts, however, have a more grim view of Apple’s services business. These analysts said that while Apple’s services business jumped 27.5% year over year to $10.8 billion in December, they “are quite concerned that Services growth is going to slow meaningfully beginning in the March” quarter.
One of the problems for Apple’s services business, the Macquarie Research analysts noted, is that some of its biggest drivers of sales like Apple Care support and app store revenue are likely to shrink while faster growing services like iCloud and Apple Music “are not big enough to offset the slowdown.” Slower sales of the iPhone likely means that fewer people will be servicing their iPhones through the Apple Care support program, the analysts noted, while Apple’s app store is likely to face its own set of challenges.
For instance, Netflix has recently altered the way people can sign up to its video streaming service so that a cut of the company’s sales don’t have to trickle back to Apple via the app store. More maneuvers like this from other companies could significantly impact the revenue Apple gleans from its app store.
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Dan Ives of Wedbush said in an analyst note that Apple’s news of its revised guidance on slowing iPhone sales “was clearly Apple’s darkest day in our opinion and represents a challenging growth period ahead for the company (and its investors).”
From Ives:
Apple’s decisions over the coming months around pricing, future hardware redesigns, timing of 5G smartphones, and driving its core services business will have implications for years to come as Cupertino now faces the biggest fear among bulls which is an installed base (we estimate roughly 750 million active iPhones worldwide) that could stall out and not grow over the coming years and in a nightmare scenario decline.
Although many analysts were worried over Apple’s iPhone issues, one remains unconcerned and upgraded Apple shares to “neutral” instead of “sell.” as CNBC noted. New Street Research analyst Pierre Ferragu said in a research note that the worst appears to be over for Apple, which indicates that things can only get better.
“We nevertheless expect the situation to stabilize in 2020 and EPS growth to resume,” Ferragu said. “The stock is now trading close to 10x our 2020 earnings expectation, a historic low in absolute and relative terms, and see limited further downside to the stock.”
