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Apple: Caution Guaranteed – Apple Inc. (NASDAQ: AAPL)



Apple (AAPL) guidance for the release of Q1 2019 was for a strong quarter. In its fourth fourth edition, Apple guided as follows:

Today, the flower of the rose came and Apple reduced the guide by $ 5 to $ 9 billion in revenue and pointed to lower iPhone sales as the cause. It's hard to imagine a quarter where Apple doesn't have its own $ 9 billion guidance. The market is likely to punish Apple shares if there are no offsetting positive news.

Apple's decision to price the iPhone X north of $ 1000 is a likely culprit. Only deadly Apple fans have some interest in paying $ 1000 for a phone to replace one they may have paid as little as $ 649 to buy. The iPhone X starts at $ 999 and X Plus at $ 1.149. The latest iPhones offer little relief from the high prices and see the clip.

Competitor Samsung seems to get a similarly mild response to its Galaxy S9 and S9 Plus, which was not launched long ago with reports of sales in the first month

Samsung and Huawei are strong, well-funded and highly innovative Apple's competitors for the premium smartphone, and their targeted efforts to succeed cannot be rejected by Apple fans.

I see Q2 iPhone sales of 50 million more or less at an average price of about $ 775 as the mix shifts away from the iPhone flagships. Apple has done an admirable job of raising ASPs in recent years, adding about $ 150 per unit. This price increase flows to operating profit and the price increase alone contributed over $ 30 billion in margin in 2017, or about half of the 61 billion operating profit reported by Apple that year. This margin is now under pressure as the high prices see the volume down.

Apple now admits that margins are falling. The company says it will no longer report the sale of iPhone devices, a dangerous indicator that management is not sure it will see robust demand. Instead, Apple wants investors to focus on revenue from services, a segment that has grown nicely.

Some forecasts make the iPhone installed base of more than 800 million which includes both devices purchased new and used.

If the installed base is 800 million units, Apple receives about $ 40 per user in services and shares it with service providers on iTunes and in the App store. The service revenue per user has little room to grow in my view, and lower iPhone sales can't help. Apple's share price rebates fast growth in services already, at least 25% of my estimate. Recent forecasts see services revenues approaching $ 35 billion this year.

The revenue of Apple services grew 24% in 2018 and 23% in 2017, so the trend is positive. Fast growth in services must be important to compensate for a significant decline in iPhone revenue. With revenues of Q1 called at least $ 5 billion, growth in services would have to exceed 30% to offset the lost margin. It's unlikely. Apple's iPhone margin is at least 60% in my opinion, and a $ 15bn fall in annual iPhone revenue can't make sense in the services.

Investors should see the details of the Q1 release when it comes out (although it may be brief in detail given the current thinking at Apple to refuse to publish device sales). If the service's revenue growth drops to 25%, it's time to leave the warehouse.

Notice: I / We have no posts in any of the aforementioned shares and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.


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