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Apple Fails to Impress the Market

Posted on Tuesday, Nov 6th 2018

Last month has not been a good one for the stock market with both the Dow and Nasdaq 100 reporting steep declines. Nasdaq 100 was down 11% last month, making it the worst month since the 2008 financial crisis. Those expecting a rebound of the tech stocks were disappointed as Apple’s (Nasdaq: AAPL) lackluster performance added to the bearish trend in the market. Post the result announcement, Apple’s stock tumbled 7% in the after-hours trading session. This was the worst reaction to Apple’s earnings in more than four years.

Apple’s Financials

Apple’s fourth quarter revenues grew 20% over the year to $62.9 billion, making it the fifth consecutive quarter of double digit revenue growth. EPS grew 41% over the year to $2.91. The market was looking for revenues of $61.57 billion with an EPS of $2.78

By segment, Apple’s iPhone revenues grew 29% over the year to $37.2 billion. By volume, sales were almost flat at 46.89 million iPhone units compared with the market’s forecast of 47.5 million units. The average selling price for the phones, however, grew 28% to $793 compared with market estimates of $750.78. The higher selling price is probably being driven by an increased contribution of the more expensive iPhone XS and iPhone XS Max, which were launched at the end of the previous quarter.

Among other segments, iPad revenues fell 15% to $4.1 billion, Mac revenues grew 3% to $7.4 billion, and the services segment grew 17% to $10 billion. Revenues from other products increased 31% to $4.2 billion.

Apple ended the year with revenues of $265.6 billion compared with $229.2 billion reported a year ago. EPS for the year grew from $9.27 last year to $12.01.

For the current quarter, Apple forecast revenues of $89-$93 billion, marginally shy of the market’s forecast of $93.02 billion.

Apple’s Expansion Plans

This was the last quarter that Apple was going to break out the individual sales numbers for its iPhones, Macs, and iPads. The market is speculating that Apple is shying away from disclosing the numbers because smartphone growth is slowing down. According to a recent IDC report , total global smartphone sales have fallen 8% over the year to 360 million units, suggesting that the market has probably peaked. But Apple claims that it will no longer disclose the number of units sold as that is not “representative of the underlying strength” of its business.

Apple meanwhile continues to release newer, and higher priced products. Smartphone market may have peaked, but Apple is now looking to increase the average revenue it earns from these phones. Recently, it released the latest model iPhone XS and iPhone XS Max. The pricing for iPhone XS starts at $999 and for iPhone XS Max at $1,099. Here is an interesting graph published by Quartz that shows the rising average selling prices for the iPhones over the years.

While Apple may be counting on a higher price point to drive growth, I think it needs to release a lower priced variant as well. Its iPhone XR, an LCD version of the iPhone X, is cheaper at $749, and is priced similar to Samsung’s S9 and Google’s Pixel 3. But to grow in markets like those of India, another option may be required.

The latest devices do boast of the industry’s first 7-nanometer A12 Bionic chip with an Apple designed 8-core Neural Engine that is capable of executing 5 trillion operations per second. Apple believes that it is far superior from the competition as it is able to use real-time machine learning to transform the way users experience photos, gaming, augmented reality, and other services. It makes full use of the dual camera system that shoots portrait-mode photos with Smart HDR, and dynamic depth of field and Face ID is even faster.

Apple is also upgrading its OS and recently released the iOS 12 which comes with system-wide performance enhancements, Siri Shortcuts, and new tools that will help reduce interruptions and help manage screen time. It also features ARKit 2, an upgrade to its augmented reality engine that makes simultaneous multi-user experiences and real-world object incorporation possible.

Within the iPads, it released the new iPad Pro that is integrated with the Apple Pencil and a new streamlined full-size Smart Keyboard. The iPad Pro is targeting on becoming a leader in the ultimate creativity and productivity device.

The biggest news for Apple though was its services segment. This was the best quarter ever for the segment with record revenues of $10 billion as it saw growth across the App Store, cloud services, AppleCare, Apple Music and Apple Pay. Apple Pay is the leader in mobile contactless payment service worldwide with transaction volumes tripling over the year. The increase is driven by its relationships with vendors like Costco, which have rolled out the service in more than 500 of its US warehouses.

Among other products, it continues to bring more features to the Apple Watch. It will be releasing the ECG App to Apple Watch Series 4 customers in the US later this year. It is also expanding the footprint for HomePod and recently released it in Spain and in Mexico.

While Apple may be advancing full steam ahead on new product and service launches, I would like to know from the users how many of them are going to upgrade their phones given the high price tag associated with them.

Apple’s stock is trading at $207.48 with a market capitalization of $1 trillion. It had peaked to a record high of $233.47 in August this year. It was trading at a 52-week low of $150.24 in February this year. The recent decline in the stock price is driven primarily by the overall investor sentiment.

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