Concerns over slowdown in iPhone demand push down Apple shares
Bloomberg November 3, 2018
Apple Inc. shares had their worst day since 2014 amid concerns that growth in its powerhouse product, the iPhone, is slowing.
In the fiscal fourth quarter, Apple said iPhone unit sales barely grew from a year earlier, even though new flagship devices came out in the period. At the same time, Apple said it would stop providing unit sales for iPhones, iPads, and Macs in fiscal 2019, a step toward becoming more of a services business. While some pundits praised the move as a way to highlight a potent new business model, many analysts complained it was an attempt to hide the pain of a stagnant smartphone market.
The reduced disclosure "raises the specter of a sustained iPhone downturn," wrote Nomura Instinet analyst Jeffrey Kvaal. He has a neutral rating on the stock and cut his price target to $185 from $215. Kvaal added that results in other Apple units "were also generally uninspired," leading him to lower his earnings expectations for the next two years.
The stock slid 6.6 percent to $207.48 in New York Friday, the biggest single-day decline since January 2014 and trimming the gains for the year to 23 percent. The decline helped push Apple's market value to $987 billion, after it hit $1 trillion in August.
Apple has been praised for being one of the lone major technology companies to break out how many of each of its major products it sells each quarter. When iPhones were the hot new thing, like in 2015, it was easy for the company to tell investors it shipped 46 percent more of the devices.
Now, the smartphone market has matured and growth is harder to find. Global shipments fell 8 percent in the third quarter, compared with a year earlier, leaving the industry "effectively in a recession," Strategy Analytics wrote in a research note after disappointing Apple results on Thursday.
Reporting 90 days of unit sales no longer presents an accurate picture of Apple's performance, Chief Financial Officer Luca Maestri said. Chief Executive Officer Tim Cook likened reporting unit sales of products to disclosing how many items are in a shopping cart at the grocery store versus how much the items cost.
Some analysts were unimpressed. "No one saw that coming. What are they hiding?" Neil Campling, head of tech, media and telecom research at Mirabaud Securities Ltd., wrote in a note to clients.
Others saw the change as a strong signal that Apple sees itself becoming more of a services business with digital subscriptions anchored to an installed base of more than 2 billion active users of its devices.
"Apple is trying to shift the discussion to services and recurring revenue, because the more recurring revenue, the higher your valuation becomes," Shannon Cross of Cross Research said.
Indeed, Maestri said the company will provide more data on its Services division, such as the cost of sales. That part of the business has been growing well, powered by iCloud and Apple Music subscriptions, app downloads, and iTunes video purchases. The company is working on digital newspaper subscriptions and original video content for next year.
Maestri said the company hasn't given up on unit growth, but will focus on increasing revenue and maximizing gross profit margins. Maestri and Cook also plan to provide relevant information during future earnings announcements.
Campling said that sounded like Apple will give commentary when it has good news, but not when things are bad.
Still, the move is not without precedent. Apple has done it before, and other tech companies have, too -- with differing results:
Cisco Systems Inc. used to disclose sales of switches and routers, its biggest product lines. In October 2017, those divisions were wrapped into a category called Infrastructure Platforms, in part to emphasize the company's shift toward software and networking services. Analysts were suspicious at first, but Cisco was clear that the new strategy would take time and overall revenue growth has returned. The stock is up 19 percent this year.
In June, database maker Oracle Corp. stopped breaking out sales from cloud apps, platform products and infrastructure services. Some analysts worried the change would mask poor performance of its cloud-based software. Shares fell more than 7 percent the day after the company announced the decision.