Apple (AAPL) reported their fiscal Q4 results last night. In a quarter whose last two weeks benefited from pre-orders and initial sales of their highly anticipated iPhone 7 & 7+, the company’s press release instead highlighted their revenue growth in Services:
That headline makes sense when you consider the company reported its third consecutive quarterly earnings and sales decline and its first annual decline in both since 2001. And it was a quarter that saw its once hyper growth market, China decline 30% year over year for its third consecutive quarter. So Apple wants to highlight the only product segment that actually grew in the quarter, despite Services only making up about 14% of their total sales:
To be clear, the results are far from a disaster. The stock is down a few percent on what investors view as tepid guidance for the current quarter (that benefits from an extra week, a broader global roll-out of the iPhone 7, potential for continued benefit of Samsung’s Galaxy Note 7 debacle, loosening of iPhone supply and the potential for an uptick in Holiday sales of Other Products like the Watch, a category that saw a yoy sales decline of 22%, despite a modest 7% sequential increase).
The real fear for AAPL holders is that fiscal Q1 will be as good as it gets until the company releases their 10th anniversary iPhone in Sept 2017. That will likely be a major redesign after three years of the same form factor (albeit with some fairly impressive internal upgrades). Current consensus estimates are calling for a 1% yoy eps decline and a 1% yoy sales increase in fiscal Q1 and a 10% eps increase and a 6% sales increase for fiscal 2017. The stock trades 13x those eps expectations, buys back tens of billions of dollars in their stock annually, pays a dividend with a current annual yield of ~2% and has 37% of their market cap in cash, 24% net of their $87 billion in debt.
With iPad growth negative, iPhone gross margins and ASPs moderating, Services & Other Products like Watch sales not moving the needle, it’s hard to find a meaningful growth driver off of $230 billion revenue base, aside from the 2017 iPhone upgrade cycle and the potential for emerging markets like India and Indonesia to ramp like China did in 2013/14.
But for those holding your breath for India to grab the baton from China, I’ll remind you of Tim Cook’s commentary on the India opportunity from their Q2 call in April (from my quarterly wrap):
CEO Tim Cook spoke of India on a few occasions, stating that, India, the 3rd largest smartphone market in the world, has very low 4G penetration, and the rollout will “unleash the power and capability of the iPhone” and that the company has just started “building the channel out” in retail as the majority of phones are not sold from wireless carriers. Cook stated that India is “where China was 7 to 10 years ago”. If that is the case it may take just a few more years for AAPL’s sales in India to move the needle on their current $200+ billion in sales in the current fiscal year. AAPL introduced the iPhone 3GS in China in 2009, and total sales in the region were less than 10% of their $36.5 billion total in fiscal 2009, but you can see the ramp over the next 5 years, with the March quarter’s contribution 24% of AAPL’s $50.5 billion total.
It’s going to be hard for India to save the day any time soon, as demand for the iPhone SE continues to erode iPhone average selling prices (ASPs) that hit a high last quarter at $691, dropped to $645 in the March quarter and is still 3x that of average Android ASPs in Q1 of $215. And one more thing on India, recently I took a fairly unscientific look (here) at how the opportunity there may be very different than that of China, and there is one very important point that sticks out like a sore thumb, despite the inexorable emerging middle class in India, the “cost of an iPhone (not subsidized) is 26.5% of annual household income in the country, vs 13.5% in China and less than 2% in the United States.
But like China, India will be a tough market to crack Apple, despite almost 125 million smartphones set to be sold in total this year, where iPhones are still a small player.
The company shipped around 2.5 million units between October 2015 and September 2016, according to Counterpoint research, giving Apple a 2.2 percent market share. While this is up from the 1.6 percent share in the previous year, Apple could struggle to penetrate a country that is used to buying cheaper devices.
Oh and while Cook on last night’s call highlighted India as a bright-spot:
“Our iPhone sales in India were up over 50 percent in fiscal 2016 compared to the prior year, and we believe we’re just beginning to scratch the surface of this large and growing market opportunity,”
It’s important to note that this is off a very low base. As Arjun Kharpal from CNBC described this am:
But like China, India will be a tough market to crack Apple, despite almost 125 million smartphones set to be sold in total this year, where iPhones are still a small player.
The company shipped around 2.5 million units between October 2015 and September 2016, according to Counterpoint research, giving Apple a 2.2 percent market share. While this is up from the 1.6 percent share in the previous year, Apple could struggle to penetrate a country that is used to buying cheaper devices.
Just food for thought. And lastly, on last night’s call, as reported by Business Insider (Apple CEO Tim Cook got testy after an analyst asked him if Apple had a ‘grand strategy), it appears that the company’s lack of transparency on any plans beyond iPhone are starting to wear on investors and analysts who for years had become accustomed to Steve Job’s innovation hit parade, and /or his reality distortion field. Cook and UBS’s Steve Milunovich from the conference call:
This comes at a time where tech CEOs like Mark Zukerberg of Facebook, and Elon Musk of Tesla lay out their 10 year master-plans, and Jeff Bezos of Amazon is more than happy to share his vision of the future which includes smart home devices ordering products when needed via drone delivery. This past Spring I made the argument (Or do you want to come with me and change the world?) that AAPL investors might find comfort in Tim Cook’s vision of how iPhone users will be able to use the device as part of an expanding ecosystem of smart home devices, cars, VR/AR etc. But that larger vision has been missing as Apple goes from product to product release with a sense of secrecy that feels like it’s from another time. We usually know what’s going in the new iPhone from various leaks leading up the a release. Yet Apple still operates as if playing peek-a-boo with how the new camera has a filter that can make the background blurry will blow our minds when we finally see it. It’s time for the company to get inspirational again and stop over-hyping marginal improvements to existing products. That lack of a grand vision is the reason behind the lack of enthusiasm for the stock.
The stock’s pre-market decline is not surprising when you consider the stock gained nearly $100 billion in market cap since Sept 9th, following the company’s introduction of the iPhone 7&7+. Fiscal Q4 was baked in the cake, Q1 guidance could prove conservative, but if it doesn’t then the stock will be back at $100 in late January, and then it is a waiting game for the 10 year anniversary iPhone. That event could be make or break for the stock, assuming their are no surprise products or any new geographic to pick up the slack from stagnant margins and ASPs.