Has Apple Become Too Successful for Its Own Good?

When the most valuable company in the world reports record sales of its most successful product, it might seem unusual for investors to dump the shares.

Published: 24th July 2015 08:00 AM  |   Last Updated: 24th July 2015 08:00 AM   |  A+A-


When the most valuable company in the world reports record sales of its most successful product, it might seem unusual for investors to dump the shares. So why did stock in technology giant Apple plunge so fast yesterday (Wednesday)?

iPhone sales fall short

1 Sales of the iPhone are the cornerstone of Apple's success. The company generates almost 70pc of its sales from the iconic smartphone. Of the rest, 10pc comes from Mac computers, 9pc from the iPad, 9pc from services such as iTunes and 2pc from other products such as the iPod and Beats Electronics.

The California-based company sold 47.5m iPhones in the third quarter, up more than a third on the same period last year. But Rod Hall, technology analyst at JP Morgan, had been expecting sales of 49.2m, and even more optimistic analysts from US-based Brean Capital had been looking for 52m-53m.

A company's stock market value is determined by what investors are willing to pay today for profits in the future. So Apple fell short of some of the most optimistic expectations and investors who had bought the shares in the hope of a higher iPhone sales figure will now sell, as they fear they have paid too much.

Where's the Watch?

2 There is a huge weight of expectation on the new Apple Watch, given the need to grow sales every year. It is also Apple's first major product launch since the death of founder Steve Jobs in 2011.

The Watch was released in April, and investors are desperate to understand how successful it has been. But the company has yet to provide a detailed breakdown of how many Apple Watches were sold during the three months to the end of June.

Watch sales were lumped into the "other" revenue category along with the iPod and Beats Electronics. Sales in this category increased to $2.6bn in the third quarter, up from $1.7bn the previous quarter and $1.8bn in the same period last year. However, Tim Cook, chief executive, warned it would be wrong to draw any conclusions about the $1bn difference relating to sales of the new watch.

There have been reports that sales of the Apple Watch collapsed after the success of the opening week. Apple is apparently selling fewer than 20,000 watches a day in the US, down from an average of about 200,000 a day in the first week, according to analysis from Slice Intelligence.

But Luca Maestri, chief financial officer, said the number of watches sold in the first nine weeks exceeded comparable sales for iPhones and the iPad in the period after their launch.

iPad sales fall

3 Apple is experiencing falling sales of the iPad as customers turn to larger-screened phones as an alternative. Sales of the iPad fell 18pc to 10.9m, the sixth consecutive quarter of declines, and had been expected to be around 11.3m.

There is growing demand across Asia for bigger phones and Apple could to some extent be to blame for its own troubles, as the success of the larger-screened iPhone 6 is eating into the market for iPads.

Meanwhile, sales of Mac computers were up 5pc to 4.6m, increasing revenue by 7pc to $5.5bn on the previous quarter.

China slows down

4 A large portion of Apple's sales growth comes from China but the economy there is slowing. Apple's sales in China dropped 21pc to $13.23bn compared with the second quarter.

The performance is not as bad as it seems, however, as the figures were skewed by record sales in the previous quarter. Sales in China have doubled from the same period last year.

That said, the overall outlook is concerning. Smartphone sales in China contracted for the first time in six years, according to International Data Corporation. This raises fears that demand from Chinese consumers is already waning.

Xiaomi, one of China's fastest growing smartphone makers, recently downgraded its expectations for sales this year as chief executive Lei Jun admitted the market was slowing.

Is it all over for Apple?

5 While trading fell short of expectations, Apple is still in a remarkably strong position. The company remains incredibly profitable: it is sitting on a mountain of cash and its customers (and devoted fans) are tied into a range of products with services such as iTunes, the App Store and Apple Music.

The company had $194bn in cash on the balance sheet at the end of March, with about $171bn of that held overseas. It is also very dangerous to read too much into one quarter. Apple is building up to the launch of the next version of its iPhone in the next few months and the Apple Watch is expected to generate the majority of its sales in the run-up to Christmas.

That said, investors are exposed to increasing risk by holding the shares. Apple shares have been on a remarkable run, almost tripling in the past five years. The question is, how can it sustain that performance when sales rely on one product, where the fastest-growing region is struggling?

Questor believes that Apple is a victim of its own success in the fickle world of consumer technology. The shares are likely to be under pressure for the rest of the year. We recommended selling at $126 two months ago, and picked Apple as our sell tip of the year.

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