Updated: Jan 16, 2019
- Part 1
"While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China”, says Apple CEO Tim Cook in his letter to investor. Suffering from an already declining share price since October 2018, Apple has yet again slammed by a nosedive accumulating nearly 40% drop in total after the announcement of its fiscal 2019 first quarter revenue. The tech giant is expecting a revenue of $84 billion for the quarter ended December 29 compared to its originally forecasted revenue of between $89 billion and $93 billion.
This marks Apple’s first warning on its revenue guidance since the first launching of the iconic iPhone in 2007. Being Apple’s worst session since 2013, the plunge had led to a pull-back in the S&P 500 and the Nasdaq Composite. The CEO also commented that Apple’s revenue shortfall was greatly affected by China’s slowing economy. Nevertheless, it that all there is to blame?
Suffering from nearly 40% drop in 3 months is not merely the fault of one or several parties but possibly the effect of the system as a whole. Hence, what could possibly be the contributing factors of Apple’s decline?
1. Dropping sales in China
a. Trade War between the US and China causing product price fluctuation
January 2nd, 2019, Cook commented in an interview with CNBC that the imposed tariff by the US and China is contributing to economic slowdown. As products from opposite country are being charged for import, prices become relatively higher leading to decreased retail sales in the country which eventually affect Apple’s overall business. This incident highlights how vulnerable can a large company like Apple be with the ongoing US-China trade war. According to the chair of the White House Council of Economic Adviser, Kevin Hassett, Apple will not be the only victim of the trade war as there will be more companies that have sales in China, watch their earnings being downgraded in the coming future.
b. Slowing growth of the emerging markets
As mentioned by Cook, investors are expected to embrace economic weakness in several emerging markets particularly in Greater China as it turned out to have significant impact than projected. China’s economy advanced 6.5% y-o-y, turns out to be the lowest growth rate since the first quarter of 2009 which was during the global financial crisis. The lower than expected iPhone revenue accounts mainly for the revenue short fall and over 100% of Apple’s y-o-y worldwide revenue decline occurred across the iPhone, iPad and Mac in the Greater China.
c. Huawei CFO arrested for an allegation of fraud over Iran sanctions
Just when bad news are starting to slow down, more problems arise. At the request of the US, Meng Wanzhou, CFO of Apple’s biggest Chinese rival, Huawei is possibly extradited from Canada to the US to stand trail on her alleged dispute over Iran sanctions fraud. The dispute has created an outrage among the Chinese as anecdotal reports surfaced mentioning the Chinese consumers, as a result, are rejecting Apple products. This short-term dispute is likely to cause long term reputation and brand damage for Apple as the Chinese consumer may associate Apple products with the legal actions taken by the US government.
2. Apple decides to quit disclosing iPhone unit sales and other hardware items
“What you can’t say, owns you. What you hide, controls you.” – Anonymous.
Despite Apple’s growth in revenue, the number of units sold remains stagnant year-over-year. The revenue growth was because of the increased price of iPhone which raised questions among investors if Apple still has the edge to grow. Until 2 months ago, November 2018, when Apple announced to stop reporting iPhone, iPad and Mac sales numbers to investors.
Apple’s iPhone account for almost 60% of its revenue. Deteriorating sales of the iPhone will largely influence the profit of the company. This leaves investors with the impression that Apple is attempting to hide information. Allowing investors to assess its iPhone sales was an indication of the company’s strength and potential growth and because of the announcement, analyst are concern that Cook’s move might be an indicator that iPhone’s growth is over or if there are worse things to come.
3. Foreign exchange headwinds due to strong US dollar
The strong US dollar also plays a role in Apple’s revenue drop and it is forecasted that Apple would reduce future revenue growth by around 200 basis points compared to the previous year, says Cook in the letter to investors. As US dollar strengthens, Apple will be forced to raise its prices overseas. This could potentially result in the reducing demand of buyers as buyers would have to pay more for the same product. This has been happening for several years now, for instance, in 2015, the strong US dollar caused Apple to raise prices in its stores in Canada, France, Denmark, Finland, Australia, New Zealand, etc.
Then again, when it comes to pricing, is Apple simply charging too high for their products? Apple’s expensive devices do bring huge profits to the company, but it does come with a price. Because of it’s strong branding, Apple has been able to charge luxury prices on their products. When the iPhone X first launched, it was at a debut price of $999 which is about RM 4000. The pricing strategy that Apple implements had generated endless criticism leading to low number of units sold. With its proliferating price, can Apple sustain its revenue in the years to come? That remains a question.
All in all, these are some of the potential factors contributing to Apple’s decline over the past 3 months. With so much setbacks and uncertainties, it would be interesting to see Cook’s vision in bringing Apple back on its groove. Should investors be concerned with Apple’s current decline? Perhaps. Believe it or not, Apple has more impact in the Asian market than you can imagine. Should you own any Asian technology stock, somehow rather, it might be linked to the US tech giant which will be explained in the Part 2 segment. Stay tuned!
Read Part 2
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.