What’s up with Apple? Well, there has been an adage for a while in the markets that as long as Apple was doing fine, everyone else would be OK. So, Apple’s rare profits warning - disseminated to the market at the start of the first trading week this year - serves as a red flag for market watchers.
Aside from the fact that the tech behemoth’s market capitalization stood at the end of last week at just above $703 billion - down from an incredible $1.1 trillion early last October, the question is to what extent this is more Apple-specific, or more macro?
The letter from the company to investors certainly sent shockwaves through the markets. Apple's stock sunk by over 7% in after-hours trading following that missive and a $150 stock price level was in touching distance. On Wednesday January 3 it had lost $15.76 (-9.98%) and was trading at $142.16.
But by the end of the week they settled at $148.26 mark (+$6.07/4.27%), with after-hours trading seeing it a tad higher at $148.40.
But to put this into perspective this still means it is a whopping $85.21 (36.5%) off its 52-week peak reached on October 3 last year. My what an about turn.
Apple stopped disclosing iPhone unit sales in November, a move that spooked investors and analysts alike who decided that this meant that iPhone sales would be soft. Shares had already been over 31% lower in the last three months before the after-hours move on Wednesday - bears having been in charge here for some time.
Revenues are set to come in at $84 billion, versus a previous guided range of $89 billion to $93 billion. The gross margin was lowered to c.38% from a range of 38.75% to 38.5% previously.
Apple is grappling with trying to deal with two distinct issues concurrently, namely that iPhone users in the U.S. market are not upgrading their iPhones as used to, and the Chinese market appears to be slowing down and not producing as much revenue the tech giant had expected.
“Much of this is Apple specific,” noted Neil Wilson, a City analyst at Markets.com. “The company has a wide pricing range with its latest set of phones, which is confusing. It has failed to generate unit sales growth for a couple of years and has relied on higher pricing that has failed to carry through in the last quarter.”
He added: “Consumers are not upgrading quickly enough, not least because the higher pricing simply means it takes longer to pay off the debt taken on when purchasing on the phone - as seen in the growth of 3-year contracts over 2-year.”
And, when one speaks to those who have actually upgraded from an Apple iPhone 6 to 8, such as Roger Lawson, ex-chair of the U.K. Individual Shareholder Society (ShareSoc) and an active stockmarket investor, the bottom line is that it “may be a bit faster” but that’s about it.
Go back four years and iPhone users would make a decision to upgrade their phones about every two years. But fast forward to 2018 and studies revealed that the typical iPhone user was holding off for a period of almost three years waiting before shelling out for an upgrade.
And, of the bulk who had not upgraded, it was found that they felt their present phone was perfectly adequate or that the tariff of shiny new phone was simply too much. Apple thinking people will continually upgrade every two years continually could be a bit misplaced.
The profits warning also tells much about what is happening on in the broader global economy, specifically in China.
It tells us that China is experiencing a period of softness. Most of Apple’s revenue shortfall versus guidance, and over 100% of its year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad, the company said.
And, it tells us that the trade war between the U.S. and China is having a dampening effect on demand and activity. It is also a factor of dollar strength.
Some industry analysts think iPhone demand has slowed, especially for the iPhone XR and iPhone XS models. And, Apple CEO Tim Cook, has cited and blamed slowing sales in China and the battery replacement program.
That said, there a reasons to be positive. Revenues from everything but iPhones are 19% higher. This suggests very strong Mac and iPad sales were strong, whilst Services continues to make new records on a higher installed base.
According to Wilson at Markets.com in The City: “The shift to a services business continues, which ultimately should command higher multiples - certainly than where we are now post this fall with Apple now about 12 times (x) earnings.”
The London-based Scot added: “We note that the installed base of devices has risen 100 million in the last 12 months. Investors are yet to really buy into the idea that Apple can be a services business and it proving a painful process...but ultimately one that will succeed.”
Having been the world's first trillion-dollar company, Apple might be looking a bit wobbly right now, but at the stock’s current price it could be a steal. If not, we are really in troubled times.
