Apple FQ1 19 – Much ado about nothing.

An echo of Nokia between 2003 and 2006.

• Apple has ensured an exciting start to the year with its first profit warning for more than 10 years that I think indicates that there are limits to which one can increase prices in a mature market.
• Apple has downgraded its guidance for FQ1 19 with revenue now expected to be around $84bn rather than the $89bn – $93bn that it forecast at its FQ4 18 results.
• The main culprit according to Apple was the Chinese economy as the other headwinds such as product mix and the strong dollar have had the impact that Apple was expecting.
• However, it bemoaned the Chinese economy as the reason for missing its revenue expectations by $7bn which translates roughly into about 9m iPhones that were not sold.
• That is a big miss and I think that the Chinese economy is only partly to blame.
• This is because Alibaba’s Single’s Day 2018 data signals precisely the opposite (see here) where retail transactions grew by 23% YoY to $30.8bn.
• Single’s day occurs in the middle of November which is in the middle of the quarter for which Apple has just warned and so I think that there are other factors at work.
• The Chinese economy has undeniably slowed in H2 2018 but this was well known when Apple gave its FQ1 19 guidance in early November and so I think that this would have been included in its estimates.
• Hence, I think the main villain is the very high prices that Apple is charging for its new iPhones.
• There has gone hand in hand with a corresponding increase in users replacing worn-out iPhone batteries rather than buying a new device pointing to a lengthening replacement cycle.
• The net result is that users keep their phones for longer meaning that for a short time, the smartphone will go into negative growth territory and then stabilise as the new replacement cycle becomes normalised.
• This is not a catastrophe nor is it a sign that Apple is losing its grip on the smartphone market but merely a misjudgement by Apple with regard to how much money people will pay for an iPhone.
• Hence, I don’t expect market share loss or collapsing margins but lower absolute levels of profit at the same margins over a lower revenue base.
• Nokia discovered (between 2003 and 2006) that when a consumer device market matures, it becomes very unpredictable which is exactly what I think is going on here.
• At the time, Nokia withdrew some of its guidance metrics as the market was so unpredictable that it had no real idea of how it was going to perform.
• Apple is already aware of this as I think that this is the main reason why it announced that it would stop reporting unit shipments (see here) but obviously it underestimated the degree of impact.
• The net result is that Apple may well withdraw guidance all together or go back to its old habit of heavily lowballing guidance to ensure that it can come in in line or somewhat above official expectations.
• I do not in any way think that this represents Apple’s “Nokia” moment simply because there is still nothing to seriously challenge the iPhone in the high-end segment.
• This means that Apple will hold onto its margins and its market share, it is just likely to sell fewer iPhones and have much lower visibility about how many it will sell going forward.
• I still contend that it will take a major innovation in consumer devices and their use case to knock Apple off its perch and of this there is still no sign.
• Hence, Apple’ position at the top of the market continues to look secure but greater volatility and lower earnings are likely to result in some unwinding of its valuation.
• Apple has a tricky year ahead as do many of the smartphone makers who will be facing the same issues albeit with less weighty expectations of the public market breathing down their necks.