Fears about continued sales growth of iPhone mount, while praise heaped on Services

Posted:
in AAPL Investors
Analysts are continuing to weigh in on the future of Apple's growth following the company's most-recent quarterly report, with Guggenheim Securities claiming the push for higher iPhone ASPs isn't enough, while Loup Ventures insists investors should shift to thinking of "Apple as a Service" rather than a traditional hardware producer.

iPhone XS Max and iPhone XS
iPhone XS Max and iPhone XS


Apple's quarterly results at the start of November revealed marginal iPhone shipment growth of 46.9 million iPhones, but increased revenues of $37.2 billion for the product line due to raising the average selling price (ASP) to $793. While the ASP increase helped pad Apple's bottom line, this hasn't stopped Robert Cihra of Guggenheim from downgrading Apple from Buy to Neutral.

"Whereas a year ago AAPL looked like a table-pounder when iPhone units were weak but about to to be more than offset by a big jump in ASPs, which ultimately drove Apple's best iPhone revenue growth in three years," writes Cihra in an investor note seen by AppleInsider, continuing "we rather now find that setup flipped with 'growth via ASPs' widely known but just as those ASPs start to anniversary."

iPhone's average selling price
iPhone's average selling price


While noting the iPhone ASP has increased 40 percent over the past ten years, "reflecting its growing value to both consumer and business markets." Cihra points out nearly half of that growth arrived in the full year of 2018 alone, "making a period of digestion more likely."

Guggenheim's full year 2019 estimates for revenue and EPS have been cut from $281 billion and $13.41 respectively to $273 billion and $12.97, mostly due to iPhone providing nearly 60 percent of the revenue and the analyst suggesting that revenue may not grow that much next year.

Noting reports of supply chain cuts, Cihra suggests the new estimate is that Apple will sell 5 percent fewer iPhones in 2019 compared to 2018. Crucially, it is predicted that, unlike last year, the increases in ASP will not provide enough to offset the reduction in unit sales, with a forecast 3 percent year-on-year ASP rise leaving iPhone revenues down 2 percent in 2019 from the previous year.

iPhone units and revenue
iPhone units and revenue


The future of Apple's Services arm is seen as a brighter spot for the future according to Cihra, who predicts revenue growth of 19 percent year-on-year for all of 2019, with the App Store providing 38 percent, Music and iTunes at 17 percent, and Licensing at 15 percent. The reliable growth will help increase its overall contribution to Apple's revenue to 16 percent from 14 percent, and gross profit from 24 percent to 28 percent.

In his own note, Loup Ventures analyst Gene Munster continues to put forward the opinion that investors should change the way they think of Apple, in what he has previously termed as "Apple as a Service." While analysts and investors continue to focus on the iPhone's unit sales, Munster believes Apple's reliance on iPhone for revenue growth will diminish, in favor of increasing its portfolio of software services.

Revenue earned by Apple's Services arm
Revenue earned by Apple's Services arm


During the results, it was announced Apple would no longer report hardware units numbers, a change that would prevent analysts from calculating the iPhone ASP, as well as from seeing how popular the iPhone is overall. Apple CFO Luca Maestri defended the move by claiming there is no correlation between unit sales and the stock price over the last three years, and that unit figures have "not been necessarily representative of the underlying strength" of the business.

In supporting this view, Munster claims data from the results can be used as evidence that this is a better way of thinking. According to his analysis, the unit growth of the iPhone, iPad, and Mac are disassociated with the revenue, earnings, and company's stock price since late 2015.

Apple's unit growth against revenue, earnings, and its stock price (via Loup Ventures)
Apple's unit growth against revenue, earnings, and its stock price (via Loup Ventures)


The price dispersion within the iPhone product line has also increased over time, with the wide range of iPhones Apple currently sells for between $450 and $1,450 being a dramatic shift from just two years ago. "This is important because each unit of sale can now have a very different impact on revenue," suggests Munster.

The idea of using Google Trends to compare the interest in new iPhones to those of previous models is also challenged, with the conventional view claiming spikes in search traffic for the latest models have declined over the last four years, suggesting interest in the iPhone is softening. Referring to research from Inflection Capital that analyzed Google Trends for all iPhone models, it seems that interest is still growing for iPhones, and is spread across more models.

Munster then goes on to insist investor concerns over softening iPhone demand is an overreaction. "Interpreting data points around demand from the supply chain is a dangerous art," Munster claims. "Historically, investors and analysts (present company included) have drawn the correct conclusion as many times as the incorrect one."

As an example, the reports about Lumentum's disappointing guidance could be accounted for by Apple getting closer to rival suppliers II-VI and its recent acquisition of Finisar for future VCSEL orders.

Apple's frequent changes to components and suppliers is also said to add complexity to decoding supply chain data points.

Apple's guidance for the December quarter anticipates revenue would be 2 percent down on Street expectations. "The odds that something has materially changed between then and now is low," the analyst asserts. "things do change, but typically not that quickly. There would be real cause for concern if we continue to hear cautionary comments from suppliers into mid-December and early January."
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Comments

  • Reply 1 of 40
    It's a catch 22. The more you raise prices to offset a mature slowing market the fewer people buy. At some point Apple will reach the tipping point and then we'll see how they adjust. 
  • Reply 2 of 40
    lkrupplkrupp Posts: 6,516member
    It's a catch 22. The more you raise prices to offset a mature slowing market the fewer people buy. At some point Apple will reach the tipping point and then we'll see how they adjust. 
    Well, the rumor is that Samsung’s foldable phone will cost $1,700.00 so...
    edited November 14 80s_Apple_Guywatto_cobrajony0
  • Reply 3 of 40
    Yeah - Apple makes such a quality product that increasing prices are going to deter people from upgrading annually or every two years.  When you have a 7s that works great (esp if you have the battery replaced) it can be hard to justify paying $1000 for a new phone 
    netmagegilly33watto_cobra
  • Reply 4 of 40
    slurpyslurpy Posts: 5,062member
    Why the fuck do sales have to "keep growing"? What's wrong if Apple continues to sell at their current numbers until the end of time? Why is that such a disaster? They already sell so much more, and make so much more profit than anyone else, that it's insane. At their current level, why is "slowing growth" such a terrifying thing? I've never understood this.
    AppleExposedn2itivguyradarthekatwatto_cobrajony0
  • Reply 5 of 40
    Yeah - Apple makes such a quality product that increasing prices are going to deter people from upgrading annually or every two years.  When you have a 7s that works great (esp if you have the battery replaced) it can be hard to justify paying $1000 for a new phone 
    This is my wife and I. We upgrade every 2 years and I think our iPhone 7 Pluses were 880 a piece, although we got a $650 credit for one. But at $1250 per plus with 128GB or more (I use about 60-80GB) for 2 phones every two years? Pass. $70 for two new batteries in December and look at rolling for 3-4 years. 

    Just not not worth it. Factor in the crazy cost of insurance and deductibles. After 18 months, I drop the insurance and self insure, so the savings is too good for a phone that’s not really going to change what I do. I don’t mobile game. The battery life and camera are the two areas I’d like to see improvement over the 7+. 
    freshmaker
  • Reply 6 of 40
    I'm sure there must be people at Apple who know that constantly raising prices will lead to less sales if the competition has products that are similar in features and cost less. It doesn't take a genius to figure something like that out. I'm sure that's why Apple is trying to build Services which will support the iPhone's already large installed base. It's just that no one on Wall Street, except Warren Buffett, wants to hear anything about Apple's Services. Most big investors are only concerned with how many iPhones are sold each quarter. Now they're not even going to know that much on the next quarterly report. Apple shareholders hoping for a rising share price are going to be screwed because big investors only live by one metric and that's unit sales growth. As a small investor, I don't care about counting unit numbers because I'm long Apple, not ready to sell stock and will be happy to collect my quarterly dividends for years to come. I'm not as greedy as the big investors are.

    I think Apple could find other ways to grow revenue and profits but Apple appears to be stuck in some sort of iPhone rut. Apple may be trying to change gears by growing Services, but Wall Street is having none of it. I don't believe there's any way possible for Apple to sell more high-end iPhones, so I think they have to find another high-end product that will have unit sales growth. Services just isn't enough to satisfy greedy people. Maybe an acquisition of some software company would help. I wish Apple had acquired some large cloud business like the other major tech companies did, but Apple didn't have the foresight to grab that low-hanging high-growth rate fruit known as the CLOUD. I'm just so sick of greedy big investors fretting over quarterly iPhone sales, but they're running the show and I'm just a poor bystander getting caught up in their cowardly mess.  I'm sure Apple will regain it's $1T market cap valuation sometime next year, but it appears Apple will just have to keep buying back shares and raising dividends for the time being as the share price remains stuck in the toilet.
    edited November 14
  • Reply 7 of 40
    jungmarkjungmark Posts: 6,568member
    iPhone sales were never weak. Apple met its accurate targets. It’s not its fault that WS guesses wrong. 
    AppleExposedneil andersonwatto_cobra
  • Reply 8 of 40
    slurpy said:
    Why the fuck do sales have to "keep growing"? What's wrong if Apple continues to sell at their current numbers until the end of time? Why is that such a disaster? They already sell so much more, and make so much more profit than anyone else, that it's insane. At their current level, why is "slowing growth" such a terrifying thing? I've never understood this.
    Why?  Big investor fear and greed is why.  You need to listen to some of those big fund managers who never want to lose a penny.  It's like they live and breathe for big gains and any possible losses will send them dumping and fleeing like rats from a sinking ship.  Wealthy people are just like that.  They don't want to lose any money, no matter what.  Even rumors spook these big money people.  When you hear the expression about investor concerns, they're not talking about me who is in Apple for the long haul and quarterly dividends, they're talking about those big fund managers who'll toss their whole Apple bundle because they're somewhat nervous.  They're always moving money from stock to stock, looking for some safe haven even if the entire market is a mess.  They're not interested in dividends or stabilizing a weak market.  All they want is big gains from somewhere, anywhere.  Their greed is insatiable.  There was this fund manager named O'Leary who dumped all Apple holdings for spite when Apple announced it wasn't going to report unit sales.  He said no company can treat him like that and get away with it.  He instantly bid good riddance to Apple for that one reason.  If that isn't a knee-jerk reaction, then nothing is.  I would never do something stupid like that.  I can afford to wait and see how Apple's new method turns out.
    bulk001radarthekat
  • Reply 9 of 40
    Bad news chases bad news. The AAPL selloff is still in a panic phase. Tim needs to get out in front of this PR shitstorm they caused by springing their surprise change in quarterly reporting on the public. It’s just completely unnecessary since investors could’ve been eased into the change instead.
    edited November 14
  • Reply 10 of 40
    jungmark said:
    iPhone sales were never weak. Apple met its accurate targets. It’s not its fault that WS guesses wrong. 
    They screwed up by unexpectedly changing their reporting. Although other companies were evidently already doing the same, the (formerly) biggest company in the tech sector needs to recognize their position.
  • Reply 11 of 40

    There are lots of things Apple has for sale this holiday season. If Apple can keep their devices on the shelves or available for on time delivery I’m guessing this season will be one of the biggest for Apple.


    Consider all the toys newly available for this buying season


    HomePod

    Apple Watch 4

    iPad Pro 11” and 12.9”

    iPhone Xs, Xs Max and the Xr 

    Apple Pencil 2

    Apple folio keyboard

    MacBook Air 

    Mac Mini

    MacBook Pro 


    AppleExposedfastasleep
  • Reply 12 of 40
    Apple's online services have been famously awful for decades. A consumer facing company turning towards service revenues is a very bad thing. It means more fees for everything that used to be free or not needed. Service fees drive products like the Ring Doorbell which could record to your local network storage devices but instead forces you pay for online storage while stealing your bandwidth. We would love it if Apple included some free services with their overpriced computers and mobile devices but instead we can expect them to raise their prices. For developers, service is why they have to pay 30% of their app revenues to Apple. Don't expect any reduction in that percent. Will Apple start charging for Mac OS and iOS updates? That's a service. Service fees suck. They are like little vampires sucking on your wallet every month.
  • Reply 13 of 40
    tzeshantzeshan Posts: 1,793member
    It seems majority of posters agree that raising iPhone prices will hurt sales. Can they agree that raising tariffs will hurt production? What is production? Production is GDP. This is economics 101. Lower GDP will hurt people's ability of buying. When people have less money they will seek cheaper products. 
    n2itivguy
  • Reply 14 of 40
    wizard69wizard69 Posts: 12,637member
    It's a catch 22. The more you raise prices to offset a mature slowing market the fewer people buy. At some point Apple will reach the tipping point and then we'll see how they adjust. 
    Apples recent price increases are frankly stupid.   Some products suffered more than others but increasing profits by raising prices to the point that you are no longer competitive has destroyed many businesses.   I only purchased my Iphone XS this time around because my iPhone 4 was beyond usable.   I have a need for a desktop but lets face it the Mini is now far harder to justify, especially for server duty..
    rogifan_newmuthuk_vanalingam
  • Reply 15 of 40
    Cook has never seemed to be one who is driven by the fluctuations of the market. Not only has Apple known that the point of market saturation was coming for phones and tablets but they have been actively working to prolong the life of older devices (ios12 optimized to help older phones and the new eGPU for laptops could make people hold onto their Macs longer). Either they are prepared to take the short term hit as the refresh cycle expands by a year or two, knowing that this is good for their consumers and in the long run will create more loyal customers and so more money, or they have something else in the pipeline that no one is seeing as a big revenue generator. That could
    be services or is there another product that they will bring to market soon? 
    radarthekat
  • Reply 16 of 40
    They’ve changed the game and prices on all three lines are now too high. Half of the iPhone total price increase over time has come in the last year alone. This will be the first year since the iPhone was introduced that we don’t upgrade.
  • Reply 17 of 40

    I'm sure there must be people at Apple who know that constantly raising prices will lead to less sales if the competition has products that are similar in features and cost less. It doesn't take a genius to figure something like that out. I'm sure that's why Apple is trying to build Services which will support the iPhone's already large installed base. It's just that no one on Wall Street, except Warren Buffett, wants to hear anything about Apple's Services. Most big investors are only concerned with how many iPhones are sold each quarter. Now they're not even going to know that much on the next quarterly report. Apple shareholders hoping for a rising share price are going to be screwed because big investors only live by one metric and that's unit sales growth. As a small investor, I don't care about counting unit numbers because I'm long Apple, not ready to sell stock and will be happy to collect my quarterly dividends for years to come. I'm not as greedy as the big investors are.

    I think Apple could find other ways to grow revenue and profits but Apple appears to be stuck in some sort of iPhone rut. Apple may be trying to change gears by growing Services, but Wall Street is having none of it. I don't believe there's any way possible for Apple to sell more high-end iPhones, so I think they have to find another high-end product that will have unit sales growth. Services just isn't enough to satisfy greedy people. Maybe an acquisition of some software company would help. I wish Apple had acquired some large cloud business like the other major tech companies did, but Apple didn't have the foresight to grab that low-hanging high-growth rate fruit known as the CLOUD. I'm just so sick of greedy big investors fretting over quarterly iPhone sales, but they're running the show and I'm just a poor bystander getting caught up in their cowardly mess.  I'm sure Apple will regain it's $1T market cap valuation sometime next year, but it appears Apple will just have to keep buying back shares and raising dividends for the time being as the share price remains stuck in the toilet.
    There is a little more to it than just unit grow. I suspect that they did this now because they know that they are in a position to make top line growth next quarter look really really good and then all the tiara tantrums will be forgotten and everyone will gush about what a great financial juggernaught the company is. 
    radarthekat
  • Reply 18 of 40
    slurpy said:
    Why the fuck do sales have to "keep growing"? What's wrong if Apple continues to sell at their current numbers until the end of time? Why is that such a disaster? They already sell so much more, and make so much more profit than anyone else, that it's insane. At their current level, why is "slowing growth" such a terrifying thing? I've never understood this.

    Because every company wants growth. Why would anyone want to invest in a company whose revenues and profits are flat? Maybe Apple won’t grow from existing products much anymore but it’s not like there aren’t new products or services that can increase growth.
  • Reply 19 of 40
    jungmark said:
    iPhone sales were never weak. Apple met its accurate targets. It’s not its fault that WS guesses wrong. 
    Wall Street got spooked when Tim and Luca said the company would no longer report sales figures. They didn’t bring it up first thing on the earnings call they mentioned it last almost as an aside. And didn’t replace it with something more meaningful like ARPU or install base. Totally blindsided Wall Street and then on top of it come supply chain rumors of possible weak sales. Oh and Wall Street is full of nervous nellies always thinking Apple is one quarter away from disaster.
  • Reply 20 of 40
    bulk001 said:

    I'm sure there must be people at Apple who know that constantly raising prices will lead to less sales if the competition has products that are similar in features and cost less. It doesn't take a genius to figure something like that out. I'm sure that's why Apple is trying to build Services which will support the iPhone's already large installed base. It's just that no one on Wall Street, except Warren Buffett, wants to hear anything about Apple's Services. Most big investors are only concerned with how many iPhones are sold each quarter. Now they're not even going to know that much on the next quarterly report. Apple shareholders hoping for a rising share price are going to be screwed because big investors only live by one metric and that's unit sales growth. As a small investor, I don't care about counting unit numbers because I'm long Apple, not ready to sell stock and will be happy to collect my quarterly dividends for years to come. I'm not as greedy as the big investors are.

    I think Apple could find other ways to grow revenue and profits but Apple appears to be stuck in some sort of iPhone rut. Apple may be trying to change gears by growing Services, but Wall Street is having none of it. I don't believe there's any way possible for Apple to sell more high-end iPhones, so I think they have to find another high-end product that will have unit sales growth. Services just isn't enough to satisfy greedy people. Maybe an acquisition of some software company would help. I wish Apple had acquired some large cloud business like the other major tech companies did, but Apple didn't have the foresight to grab that low-hanging high-growth rate fruit known as the CLOUD. I'm just so sick of greedy big investors fretting over quarterly iPhone sales, but they're running the show and I'm just a poor bystander getting caught up in their cowardly mess.  I'm sure Apple will regain it's $1T market cap valuation sometime next year, but it appears Apple will just have to keep buying back shares and raising dividends for the time being as the share price remains stuck in the toilet.
    There is a little more to it than just unit grow. I suspect that they did this now because they know that they are in a position to make top line growth next quarter look really really good and then all the tiara tantrums will be forgotten and everyone will gush about what a great financial juggernaught the company is. 
    Well, their streaming video service will probably be unveiled soon, possibly around the same time Disney+ is available? Frankly, Apple making some kind of cross-licensing deal with Disney would be a good idea.
    AppleExposedradarthekatmdriftmeyer
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