Almost 16 years have passed since the legendary launch of the first iPhone, which shocked the world in June 2007 and sparked a buying spree for Apple products. During that time, the Silicon Valley giant enjoyed almost exponential growth in sales of its flagship products, followed by record sales, profit margins and stock buybacks worth hundreds of billions of dollars. However, yesterday’s launch of the new iPhone 15 did not bring with it another technological revolution. The changes compared to the previous version of the “Apple phone” seem more cosmetic than groundbreaking. The new Apple Watch also did not shake up the world of new technology, despite some “gadget” functions. Moreover, the launch of the new iPhone comes at a time when the global economy is walking a fine line, shying away from recession in the era of tense relations between Washington and Beijing. Will the introduction of the new model prove to be another “business success” for the company? Or perhaps a red flag that shows Wall Street the turning point? Because if something can’t last forever, it has to end at some point.
Turbulence ahead?
The fact is that Apple combines (or has combined) the characteristics of a growth company (dynamic sales and profit increases) and a “value” (fundamental “quality”, competitive advantages). The fundamental value of the Apple brand as a whole is underscored by the fact that its shares make up more than half of the portfolio of Berkshire Hathaway, Warren Buffett’s investment vehicle. A wide business moat and consistent expansion of market share (while attracting “loyal” customers) have made Apple a growing company, even in times of high inflation. Skillful management, share buyback programs and increasing multiples – in a word, the company “mastered” quality and great results. “Cheap” manufacturing in Asia supported net margins. iOS software has become the benchmark for intuitiveness and quality for many (although claiming it beats its Android rival seems subjective).
As the tide has risen, the market, which has been positively surprised for more than a decade, has become increasingly convinced that this growth will continue for a long time to come. Maybe even forever. With these expectations, the shares of the Californian giant also rose. Is it really that obvious? It would be a mistake to underestimate competitors like Samsung. Raising the bar for Apple after such impressive growth and successive, increasingly “exciting” product launches also runs the risk of disappointment. It seems appropriate to compare the company’s incredible era of multi-year growth to a hurdle race in which an athlete overcomes one obstacle after another – but with each successive obstacle he loses a little of his strength, which becomes more and more noticeable.
iPhone sales have been declining year-over-year since 2021 – will this decline accelerate? After adjusting for seasonality and risk factors, we expect the total number of models sold to reach 221 million units in fiscal 2023, slowly approaching the 2018 level and below the result achieved at least in 2015. It’s worth noting that the iPhone has been the company’s strongest product in recent years, and the decline in its sales will likely be accompanied by a sharp decline in demand for other products. Source: Bloomberg Finance LP, XTB Research
A combination of negative factors
If iPhone sales momentum ever slows alarmingly, today’s macroeconomic environment appears to be the “best opportunity” to do so. Admittedly, U.S. household net worth is at a record high today (nearly $155 trillion, according to the Federal Reserve). Unemployment is also not a problem for the company (despite the economic slowdown in China) – it is very low in most major economies. However, the question is: will consumption remain at current levels?
However, this macroeconomic situation is likely to change in the coming months as central banks curb inflation and thus slow economic growth. It appears that a harder hit to the labor market and wage growth is more a matter of time and magnitude. How will Apple handle this? This is not the only problem and is just the tip of the economic iceberg. High interest rates mean more expensive loans and higher payments. To date, a significant portion of the company’s products have been purchased through various forms of credit. Added to this is the credit shortage at banks (higher hurdles for borrowers) and the problem of highly indebted households, which eagerly took out loans at a time when interest rates were close to zero… This is also likely to have an impact on sales dynamics. There are also geopolitical questions.
Friction remains high between the US and China, and the two sides are trying to sever the thread of interdependence, which could lead to further escalation. Apple is bearing the brunt of a gradual shift in production from China to neighboring Asian countries. Shortly before the iPhone’s launch, Chinese regulators banned the use of Apple phones by government officials. Morgan Stanley estimates the ban will mean a decline in sales of about 4% this year. China accounts for about 20% of Apple’s market, but the question is more whether the Chinese ban will not be extended in some way… The trade war is another reason Apple is at a crossroads. This risk was not apparent in the Company’s previous twelve years of operations.
Red flags?
It seems like we’ve already seen the start of this story in the Q2 results, which, despite an impressive net profit, suggested that demand for “Apple” is no longer as buoyant – in particular, the lower sales concerned iPads or Macbooks. Of course, Apple’s high-margin services (TV, Pay, etc.) are doing very well, but let’s not forget… Their growth potential is somewhat limited by device sales – mainly iPhones. The demand for the iPhone seems to be a kind of basis for further growth. If growth fails to materialize or measures prove deeply unsatisfactory, the market may begin to view Apple as a company that has had its “moment in the spotlight.” After all, history knows many cases in which large companies reached certain limits. Also worth mentioning are the cases of companies such as Xerox and Polaroid, which were also “doomed to growth” in their heyday.
In July, the world’s largest luxury conglomerate LVMH warned that demand for luxury products in the United States had plummeted. Of course, Apple is not a luxury brand, but in the world of technology it is undoubtedly viewed as such. So LVMH’s warning appears to be serious, even if its direct impact on Apple’s results this quarter is uncertain. However, seasonally, the third quarter (fourth by the company’s fiscal metrics) was often the weakest, and after the iPhone launch, Apple’s stock price was lower at the end of the quarter 75% of the time. According to Counterpoint Research, 294.5 million smartphones were shipped worldwide in the second quarter, compared to 268 million in the first quarter. Apple was able to assert itself the strongest against the competition. The number of iPhones shipped was 45.3 million, compared to 46.5 million previously (but still a low number).
Apple’s pendulum
The positive factors that have fueled Apple’s sales and business growth appear to be starting to fade. However, we should remember that the market situation is influenced by countless, even random, factors and the future is very difficult to estimate accurately. Although we do not know what the future will look like, we should try to assess the current state of affairs well. Currently, Apple does not appear to be overvalued, and the company is far from having a “crazy valuation” similar to that of Nvidia or other technology companies. However, it is difficult to say that today’s valuation represents a “margin of safety” in the event of a recession, which could potentially bring dramatic changes in the number of devices sold. Of course, Apple’s growth cannot be written off, and bulls are eagerly awaiting the release of VR Vision Pro, which could “revitalize” the virtual reality market. The further development of artificial intelligence – if it is implemented in new “Siri” functions – could also stimulate the market.
The main changes in the new iPhone model concern the USB-C connectivity, the camera (although the night mode photo in the presentation caused controversy – the quality was questionable), the A17 processor and the capabilities of the most powerful Pro versions. Will the finger-snap feature that lets you check your heart rate with the next-generation Apple Watch boost sales? Will the gaming features of the new iPhones boost sales enough? It’s likely that Apple’s business will sustain itself regardless of the economic climate. Even if its growth slows or declines. The question is what will happen to the valuation in the stock market, which is primarily influenced by factors such as psychology – greed and fear. The doubts are getting bigger and bigger here.
The markets apparently received the Apple event without fireworks – there is no talk of a technological breakthrough this time. After the presentation of the iPhone 15, Apple shares fell by almost 1.5% on the Nasdaq stock exchange.
Daily chart of the Apple stock (AAPL.US). The first key support level in the downside scenario appears to be at $165, where we see the 23.6 retracement of the March 2020 bullish wave and the key average that theoretically defines the trend – SMA200 (red color). Source: XTB Platform
Eryk Szmyd
XTB Financial Markets Analyst
THE GERMAN LEADING INDEX
- CONTINUOUS low target spread of just 0.8 points in the long trading session from 8 a.m. to 10 p.m.! Many other brokers have a favorable spread only from 9 a.m. to 5:30 p.m….
- Without additional order commission!
- Mini CFDs, trading from 0.01 contracts
- Find out here!
The author may be invested in the securities or underlying assets discussed.
The authors of the publications prepare this information at their own risk. Analyzes and opinions are not written with reference to the specific investment objectives and needs of any particular person. XTB publications commenting on specific situations in the financial markets and general statements made by XTB employees regarding the financial markets do not constitute, and cannot be construed as, advice to the customer by XTB. XTB is not liable for any losses that arise directly or indirectly as a result of decisions made in relation to the content of the publications.
CFDs are complex instruments and involve a high risk of losing money quickly because of the leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Investment success and profits from the past do not guarantee success in the future. Contents, newsletters and communications from XTB do not constitute investment advice. The communications are as Promotional communication to understand.