Apple relying on higher selling prices, services growth in fourth quarter analysts say
Going forward, Apple will be increasingly reliant on a combination of driving up average selling prices for iPhones and fostering services revenue, several analysts contended in the wake of the company's Q4 results.
The iPhone XS and XS Max.
Apple is seeing "continued success" in steering people towards its most expensive iPhone models, this year namely the iPhone XS and XS Max, J.P. Morgan's Samik Chatterjee said in an investor memo obtained by AppleInsider. Meanwhile, Apple saw its services revenue -- representing things like the App Store, Apple Music, and iCloud -- grow to nearly $10 billion.
"iPhone unit volumes have largely plateaued since FY15 and it is well understood by investors that Apple's strategy with the iPhone revolves around driving revenue growth through ASP increases and maximizing revenue opportunities over the lifetime of a device with a customer through service offerings, relative to trying to drive unit sales/ market share," wrote Chatterjee.
That sentiment was echoed by Guggenheim's Robert Cirha, who suggested that Apple's decision to stop reporting iPhone, Mac, and iPad unit sales is not only indicative of this strategy but may be to make it less obvious to customers that it wants to charge them more. The company has often come under fire for high prices, and that criticism has intensified this fall, since the cheapest new iPhone is now the $749 iPhone XR, and price hikes have also hit products like the iPad Pro and the MacBook Air.
Loup Ventures' Gene Munster argued that Apple wants investors to think of its whole business as a service, rather than paying attention to quarterly fluctuations.
"The new reporting method will force the Street to think about Apple's business as a stable and growing service, which should yield a higher earnings multiple in the long run," he said, pointing out that in the last eight quarters, the average unit growth of the iPhone has been just 1 percent.
"This 1 percent average unit growth rate is, by definition, stability," the analyst elaborated. "Conversely, if iPhone units were less predictable, investors should demand the company continues to report units."
J.P. Morgan is maintaining an "overweight" rating for Apple stock, but lowering its December 2019 price target $2 to $270 on the basis of foreign exchange "headwind." On Thursday Apple CEO Tim Cook said the company's Q1 forecast is taking a $2 billion hit on that issue alone.
Guggenheim is holding onto both its "buy" rating and a $245 price target, but scaling back its Q1 estimates, namely predicting 77 million iPhone shipments in Q1 rather than 80 million, and calling for a 1 percent ASP increase year-over-year instead of 6.
Apple itself is forecasting revenue between $89 billion and $93 billion for the first fiscal quarter of 2019, with gross margin pegged between 38 percent and 38.5 percent. Operating expenses are expected to lie between $8.7 billion and $8.8 billion, while a tax rate of approximately 16.5 percent is anticipated.
The iPhone XS and XS Max.
Apple is seeing "continued success" in steering people towards its most expensive iPhone models, this year namely the iPhone XS and XS Max, J.P. Morgan's Samik Chatterjee said in an investor memo obtained by AppleInsider. Meanwhile, Apple saw its services revenue -- representing things like the App Store, Apple Music, and iCloud -- grow to nearly $10 billion.
"iPhone unit volumes have largely plateaued since FY15 and it is well understood by investors that Apple's strategy with the iPhone revolves around driving revenue growth through ASP increases and maximizing revenue opportunities over the lifetime of a device with a customer through service offerings, relative to trying to drive unit sales/ market share," wrote Chatterjee.
That sentiment was echoed by Guggenheim's Robert Cirha, who suggested that Apple's decision to stop reporting iPhone, Mac, and iPad unit sales is not only indicative of this strategy but may be to make it less obvious to customers that it wants to charge them more. The company has often come under fire for high prices, and that criticism has intensified this fall, since the cheapest new iPhone is now the $749 iPhone XR, and price hikes have also hit products like the iPad Pro and the MacBook Air.
Loup Ventures' Gene Munster argued that Apple wants investors to think of its whole business as a service, rather than paying attention to quarterly fluctuations.
"The new reporting method will force the Street to think about Apple's business as a stable and growing service, which should yield a higher earnings multiple in the long run," he said, pointing out that in the last eight quarters, the average unit growth of the iPhone has been just 1 percent.
"This 1 percent average unit growth rate is, by definition, stability," the analyst elaborated. "Conversely, if iPhone units were less predictable, investors should demand the company continues to report units."
J.P. Morgan is maintaining an "overweight" rating for Apple stock, but lowering its December 2019 price target $2 to $270 on the basis of foreign exchange "headwind." On Thursday Apple CEO Tim Cook said the company's Q1 forecast is taking a $2 billion hit on that issue alone.
Guggenheim is holding onto both its "buy" rating and a $245 price target, but scaling back its Q1 estimates, namely predicting 77 million iPhone shipments in Q1 rather than 80 million, and calling for a 1 percent ASP increase year-over-year instead of 6.
Apple itself is forecasting revenue between $89 billion and $93 billion for the first fiscal quarter of 2019, with gross margin pegged between 38 percent and 38.5 percent. Operating expenses are expected to lie between $8.7 billion and $8.8 billion, while a tax rate of approximately 16.5 percent is anticipated.
Comments
The health of a platform's "ecosystem" depends on knowing unit sales.
Business investment is a function of predictability.
If Apple thinks it can somehow go it alone, it's going to get what's coming to it.
Edit: Apple has never stated unit sales of Apple Watch, but that doesn’t seem to be hurting sales. Didn’t Cook specifically call out wearables as having large gains last quarter?
The health of the platform depends on knowing install base not unit sales. In the future a more relevant metric would be the number of services subscribers and/or ARPU.
Cook’s grocery cart analogy falls flat. Yes, the value of cart is important, but no grocery store can survive if they don’t know what items are selling, when to reorder, and how much to reorder.
Now, like many, I don’t have a great deal of respect for the analysts. Unit sales is not the defining number that should be used evaluate Apple, though it’s the defining number which they use to write useless and baseless opinion pieces. Apple is different now, and unit sales can no longer grow exponentially; steady and linear is good. Apple has become somewhat of a utility, and unit sales will reflect that.
Apple need to reverse their decision, and do a better job of telling the story about them becoming a utility, and what they offer. It seems that was the story Jobs always told.
It can't go on forever.
I just wish they kept the Mac mini price lower. I know it packs a real punch, but it's no longer the budget computer it started out to be.
It'll join a perfectly fine list of successful companies, such as Google, Coca Cola, Berkshire Hathaway, Goldman Sachs, J P Morgan-Chase, Facebook, and Unilever. In fact, most people don't realize that a vast majority of the companies in the S&P500 -- over two-thirds -- do not provide quarterly guidance.
In a mature / saturated market, unit sales becomes irrelevant because you only grow so much. This is where the size and strength of the total user base becomes a more important with respect to Apple’s ability to grow in other areas like services and accessories. This is not reflected in yearly unit sales.
What I’d like to see Apple provide are numbers indicating the size of the installed base for iPhone, iPad, Mac, Watch.