Apple shares tumble 8% after iPhone sales fall; opportunity for investors

Investment markets are always teaching us lessons. First, that there is no easy way to make money. And second, conviction must be tempered by open-mindedness. In other words, if the facts change, so must your mind. For some months now we’ve been hearing from Apple that iPhone sales are not in trouble. Last night’s quarterly results pricked that bubble with the product’s first ever sales drop. As iPhone account for two thirds of the company’s revenues, the market reaction was ugly, dropping the share price from an already depressed $104 to $96. Apple’s management and board did their best to display confidence in the business model, announcing another boosting to the massive share buyback programme and talking up the potential of India where one billion enterprising people have yet to participate in the smart phone revolution. I buy that, but also know this is a long-term bet on the Apple eco-system rather than quarter-to-quarter sales numbers. Mr Market, however, is swayed by different factors. Last night’s 8% share price loss could well be extended today. Long-term investors should see this as an opportunity to scoop up shares now trading well below their intrinsic value. – Alec Hogg

Apple's share price took an 8% smack in after-hours trading following the confirmation in its quarterly results that iPhone sales have peaked out
Apple’s share price took an 8% smack in after-hours trading following the confirmation in its quarterly results that iPhone sales have peaked out

By Alex Webb

(Bloomberg) — Apple Inc.’s smartphone woes are deepening.

The company posted its first quarterly revenue drop in more than a decade and forecast another decline in the current period, dragged down by waning demand for the iPhone as fewer users race to snap up the latest version of the device. Shares fell as much as 8.3 percent in extended trading.

Chief Financial Officer Luca Maestri said demand has fallen off since the debut of the larger-screen iPhone 6 and 6 Plus, which led customers to upgrade more quickly. “Last year we had a very strong iPhone upgrade cycle.”

Read also: Apple launches smaller, cheaper iPhone, wants 5C market share back

With the introduction of a new model still months away, Apple investors are trying to gauge whether lackluster sales of the device, the company’s biggest revenue generator, reflect a broader slowdown in the market for high-end smartphones — or just the pause before another upgrade frenzy. Forecasts from suppliers such as Qualcomm Inc. and Taiwan Semiconductor Manufacturing Co. have suggested demand is cooling, and stalled economic growth in China is paring Apple’s sales in that region.

“China is particularly worrisome for Apple because it has risen quite quickly to become Apple’s second-most important region,” said Brian Blau, a San Francisco-based analyst at Gartner Inc. “That makes us wonder what the issue is, whether it’s a temporary issue or whether it’s going to be something longer-term.”

Sales in the third quarter, which ends in June, will be $41 billion to $43 billion, the Cupertino, California-based company said Tuesday in a statement. On average, analysts estimated revenue of $47.4 billion, according to a Bloomberg survey.

Second-quarter sales slid 13 percent to $50.6 billion from $58 billion a year earlier. That compared with the average analyst estimate of $52 billion. Net income declined to $10.5 billion. IPhone shipments fell 16 percent.

Stock Buyback

The company also said it will boost its share-repurchase program to $175 billion, from the $140 billion announced last year. Apple will increase its quarterly dividend, as it did a year ago, to 57 cents a share from 52 cents.

Read also: The ‘Apple’ Jobs built – a cash ROAM exemplar

The report showed that Apple is no longer able to count on China as a growth engine. Sales in that country, Taiwan and Hong Kong fell 26 percent in the recent quarter, a major shift from just a couple of years ago, when sales in the region were more than doubling with regularity.

The stock dropped as low as $95.86 after the report. Concerns about decelerating smartphone demand have contributed to an almost 20 percent decline in Apple shares in the past 12 months. The  stock fell less than 1 percent to $104.35 at Tuesday’s close in New York. That gave Apple a market capitalization of about $579 billion — still the world’s largest company by that measure.

IPhone Decline

IPhone sales in the recent period fell to 51.2 million from 61.2 million a year earlier. Analysts on average predicted the company would sell 50.7 million iPhones in the quarter, according to a Bloomberg survey.

The quarterly report is Apple’s first since a high-profile legal skirmish with the U.S. government over data privacy, encryption and law enforcement. The U.S. dropped two separate demands that the company help it break passcodes to get data from the iPhones used by a drug dealer in New York and a shooter in a December terrorist attack in San Bernardino, California. Apple had vehemently fought against both orders, saying that helping the government would jeopardize security for hundreds of millions of users and the cases could pose a dangerous precedent for law enforcement agencies’ access to encrypted iPhone data. The Department of Justice had argued it only wanted access to specific phones in limited instances, and abandoned the two cases after finding alternate methods for unlocking the phones in question.

Read also: Google (OK, Alphabet) passes Apple, becomes world’s most valuable company

Future Innovations

As iPhone sales slow, Apple investors are increasingly asking what might fuel the company’s next growth spurt. A number of possibilities have surfaced: virtual reality gear, a self-driving car or a live television service, for example. Yet Apple’s secretive approach to development makes it hard to predict when, in what form, or even if any of these innovations will someday surface.

Virtual reality gained headlines back in January, when Cook said VR wasn’t a “niche” and had some “interesting applications.” Meanwhile the potential allure of the automotive industry for Apple and other technology companies has been highlighted in recent weeks as Tesla secured more than 325,000 pre-orders for its latest electric car in a matter of days.

Though a new version of the full-sized iPhone probably won’t be unveiled until the fall, the company has been adding to its product line. In March, the company rolled out the new iPhone SE, partially seen as a move to bolster sales in emerging economies such as India and China. Yet analysts cautioned that the smaller phone, starting at $399 in the U.S., could risk cannibalizing sales of the more expensive flagship 6-series handsets, and may reduce the average price at which Apple sells its phones.

Read also: Technology’s gloomy 2016: Samsung joins Apple – about survival, not a battle.

‘Element of Overlap’

The lower price point of the iPhone SE is one of the main reasons for Apple’s lower-than-projected third-quarter sales forecast, CFO Maestri said in an interview. The company has been unable to manufacture enough iPhone SEs to meet demand, he added.

“Every time we launch a new product we know there is an element of overlap,” Maestri said. “We look at the opportunity to attract the first-time smartphone buyers.”

Apple also unveiled a new, smaller iteration of the iPad Pro, incorporating the power and some features of its larger Pro model for business users, aimed at stemming a persistent decline in sales of the tablet. IPad shipments in the recent quarter fell 19 percent from a year earlier to 10.3 million, topping analysts’ average projection of 9.4 million.

To help make up for dwindling growth in smartphones and other devices in the shorter term, Apple has been trying to bolster its services business, which includes its iCloud storage platform, Apple Music and the App Store. Not only is the profit margin wider on these offerings, buying them usually commits customers to subscription services that generate stable recurring revenue streams over months or years. Services was a bright spot in the second quarter, with revenue jumping 20 percent.

Sales of Mac computers declined 12 percent to 4.03 million units, less than estimates of 4.6 million.

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