Apple, being one of the most recognised companies worldwide, doesn’t need an introduction. The tech giant revolutionised the smartphone industry with the launch of their primary product, the iPhone. It was a phone no one had ever seen before. Alongside the iPhone, their other product lines such as the iPad, iMac, MacBook, iPod etc have helped them grow rapidly, especially in the past decade. The key to Apple’s success has been their innovation. However, this essential factor seems to have been dying slowly over the last few years, suggesting that Apple is reaching its market saturation.
Apple released a series of phones over the last few years such as the iPhone 6, 7, 8, X, XR, XS. They have come a long way from selling 151 million units in 2008 to 1.4 billion units in 2018. However, there has been a diminishing attraction to the eye with every new model coming out since the iPhone 6, especially. Ever since iPhone 6, the newer models have just been getting slimmer and bigger with a few changes here and there in the software. This lack of innovation is the very reason why this article is being written right now.
Since Apple’s latest quarterly financial report, the stocks have been going downhill. In fact, they have already hit the 6 months low, and seem to be approaching their 52-week low.
On Dec 4, HSBC downgraded the stock (from buy to hold/neutral) following its plummet in the market. Furthermore, they even reduced their 12-month target price from $205 to $200. HSBC’s analysts said: “Apple’s iconic hardware unit growth is broadly over for now. Revenues are only supported by higher selling prices and by the development of services. Flat unit growth has hit Apple’s share price and incidentally its key suppliers. What has made the success of Apple, a concentrated portfolio of highly desirable (and pricy) products is now facing the reality of market saturation.”
This statement lead to a 1.8% downfall in their stock in addition to the already 18% decline in the quarter. This can be seen by the sharp decline in the stock’s price at its latest date.
As stated by HSBC, Apple has only been surviving on high prices. The volume of iPhones sold has actually decreased. They sold 5m less iPhones this year than last year and yet reported a $13 billion increase in gross profit. This means that the only way that they coped up with the reduced demand is by charging higher prices to their customers. If we think from a customer’s point of view, then this strategy of Apple’s is not going to last long. Despite the fact that Apple has millions of loyal consumers that are willing to line up outside stores hours before its release, if Apple keeps increasing the price with every new model they bring into the market, even their most loyal customers are even going to have to eventually switch to cheaper alternatives such as Samsung.
Competition – Speaking of competition, Apple just got beaten by Huawei for the second position for biggest smartphone seller in the second quarter of 2018. The Chinese multinational company has been doing extremely well for itself, splitting Samsung and Apple as the top two smartphone sellers for six straight years. The Huawei P20 is a phone that has disrupted the smartphone market and proven to be a big threat for both, Apple and Samsung in the mid to long run. In fact, Huawei hasn’t even reached the US markets yet, which potentially opens the doors to a huge amount of earnings for the Chinese company. As a consumer, if you were to look at both the phones specifications, you would realise that in some aspects, the P20 actually outshines the latest iPhone. Therefore, customers would eventually shift to the cheaper alternate of Huawei, saving themselves a couple of hundred dollars.
Supplier issues – Apple is also facing troubles internally, such as their suppliers. Two of the main suppliers, FoxComm and Petragon, also suffered from reduced earnings and profits as the volume of sales of iPhones suffer. Operating profits of the two suppliers fell by 36% and 62% respectively. The suppliers are now complaining of more competition in an already shrinking market. Therefore, they are pushing the idea of production of next generation products such as artificial intelligence and the evolution of the automotive industry and the plethora of technology still possible to inject.
Prospects and How to trade this stock
Honesty, I myself am not 100% sure of how I feel about this stock and which way I think it is bound to go. Despite all the negative aspects mentioned above, Apple might have a lot in store. The only reason I think so is because of the talks of the Apple Car. This is a completely new product line for the tech firm but has the potential to be explosive in terms of consumer demand and utility in the coming years. If this project is to be successful, Apple could have another breakthrough and see its stocks skyrocket. They do seem serious about such a product line, because not long ago they took one of their suppliers public and raised money solely for the purpose of AI-related products.
There have been many talks about Apple also opening up another major revenue stream their services business such as Apple Pay and their internet based products such as iTunes. However, I personally highly doubt this is going to work because no amount of services are going to compensate for the eventual revenue loss due to the volume of sales of the iPhones.
Another major question to ask is whether it’s just Apple or the whole industry? There seems to be an overall shrinking in the smartphone industry worldwide. Last year, the smartphone industry shrunk by 9%. To my mind, I do not believe it’s the whole industry that’s going down because Huawei can counter that theory, as they have been doing better year by year. Moreover, if thought with common sense, the world is not going to stop using smartphones, it’s almost become a need in this day and age and even more so in the future. Therefore, the volume of sales is eventually going to stay constant, if not increase.
As an investor, the decision of your action on this stock would depend on the type of trader you are. If you are investing for the long term, it would be worth a shot to buy Apple stocks because the Apple Car puts a lot of hope in me and several other analysts that the tech giant might just breakthrough. However, just as a warning, I wouldn’t expect major dividend growth for a few years because they would want re-invest as much of their profits back into the development of next generation products.
On the other hand, if you are trading for the short term, I would recommend short selling this stock because I believe the prices are going to go further down due to further bad publicity for the mean while. For more information on what short selling is and how it works, please watch the following video: