Yesterday afternoon, Apple (AAPL 142.97, -14.95, -9.47%) warned about worse financial
results for the first time in the iPhone era. Still, this unprecedented event
didn't come as a huge surprise given the warnings and reports of order cuts
from key suppliers.
The company guided for first quarter revenue to fall ~5% yr/yr, down from a previous ~1-6% growth. Apple still guided for 'record' EPS, but the forecast down the income statement implied Q1 EPS growth of ~7%, roughly 10% below consensus.
This is rather unprecedented news for Apple, which has been enjoying stellar sales of the iPhone for over a decade. While reports of order cuts have weighed on Apple stock in previous years, Tim Cook, an operations guy best known for his supply chain prowess, always delivered a strong quarter within guidance, until today.
In hindsight, the degree to which Apple suppliers like Qorvo (QRVO 57.01, -4.17, -6.82%) and Lumentum (LITE 39.17, -3.42, -8.02%) warned about financial results signaled risk to Apple's forecast from early November.
Apple said fewer people upgraded iPhones and an elongated iPhone sales cycle is clearly a headwind. The company said: "Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline."
This news will surely add to broader market fears about the slowdown in China and Sino-US trade tensions. While it is unclear how much trade tensions are impacting demand for iPhones, Apple doesn't have a stranglehold on the Chinese market like it does in the US and other developed nations, where the stickiness of iOS keeps consumers within its ecosystem. There is a plethora of much lower-priced smartphone options in China, while Apple is an aspirational brand.
Apple also acknowledged iPhone upgrades disappointed in developed markets, citing a weak economy, fewer carrier subsidies, US dollar strength-related price increases, and significantly reduced pricing for iPhone battery replacements. Apple has been increasing iPhone ASPs to drive revenue growth and focusing on higher-margin service revenue, but that isn't enough to offset the massive iPhone franchise.
If anything, it seems the incremental technology improvements of new iPhones have not justified the price increases. The average person reportedly keeps a smartphone for over three years, down from a two-year average upgrade cycle some five years ago. In the first quarter last year, iPhones accounted for 70% of revenue while Great China represented a 20% overall geographic mix.
On the positive side, Apple said service revenue grew at least 27%, wearables grew almost 50% thanks to the Apple Watch and AirPods and the installed base hit a new high. As long as the installed base continues to grow, Apple investors may be able to look past the slowing iPhone replacement cycle.
Apple stock was down already down 29% since guiding down first quarter estimates and announcing it will no longer disclose shipment data on November 1. As a result, the stock was already trading at 12x fiscal 2019 earnings estimates. This morning, Apple stock is down ~8%, in-line with how much Wall Street's fiscal 2019 earnings estimates have come down, so the 12x forward EPS multiple is currently unchanged.
Still, the company's market value is now below $700 bln after becoming the first company to eclipse the $1 trln mark last summer. The company will surely be putting its $130 bln in net cash to work by buying back its stock.
Apple is weighing on its supply chain (semiconductors), the technology sector, and even some luxury brands this morning.
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