Has Apple reached its peak?
Yesterday, what we feared for months finally happened: Apple CEO Tim Cook issued the company’s first profit warning in 16 years—the last one was in June 2002 or 6 years before the initial launch of the iPhone—acknowledging a $9 billion drop in sales to approximately $84 billion from the high-end of its initial guidance of $93 billion for the last quarter of 2018.
In comparison, Apple revenues for the 2017 holiday quarter was $88.3 billion, the biggest quarter in the company’s history.
Apple CEO points to China’s slowing economy for the company’s revenue shortfall
In a letter to investors, Cook blamed the profit warning on a single key factor: The collapse of iPhone sales in China.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad,” wrote Cook.
Adding that lower than anticipated iPhone revenue, primarily in Greater China, accounted for all of the Silicon Valley company’s revenue shortfall to its original guidance and for much more than its entire year-over-year revenue decline of $4.3 billion.
In fact, Apple’s chief said that categories outside of iPhone (services, Mac, iPad, wearables, HomePod, accessories) combined are expected to grow almost 19% year-over-year.
While China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue drop, Cook revealed that in some developed markets, iPhone upgrades were not as strong as he thought they would be offering 2 rather lame excuses:
- Fewer carrier subsidizing the purchase of ever more expensive flagship smartphones like the iPhone X lineup
- Customers opting to replace the battery of their old iPhone, giving it a new life, instead of buying a new one
Atherton Research’s Take
In his letter to investors yesterday and in a memo sent to employees today, Apple CEO actually failed to mention the 2 key reasons for the iPhone sales plunge: Its price and the lack of innovation.
With the latest iPhone X lineup, Apple is selling yesterday’s technology at tomorrow’s prices and consumers are beginning to realize that, opting to cheaper and better equipped Android smartphones, especially from Chinese phone makers like Huawei or OnePlus, or keeping their iPhones longer.
Case in point, we expect that this year most of the Android flagship smartphones from Samsung, Huawei or OnePlus will be 5G capable, using the latest chips from Qualcomm or Huawei, while none of the 2019 iPhone models will work on the next-generation mobile networks.
Although we believe that Apple will release a re-designed iPhone X in 2019—with a smaller notch, a fingerprint reader (Touch ID) under the display, and a USB-C port—it will still lack the extensibility (memory card), the battery life, the lightning-fast charging capability, and the camera quality of Android flagship smartphones while being more expensive.
Therefore, our advice to Apple’s management is to focus on delivering the kind of innovation that its high priced devices were known for rather than ever-increasing the price of its smartphones—the price for Apple’s flagship phone has shot nearly 47% in 3 years, from $749 to $1,099—to compensate for its declining sales.