Apple shares slide amid concerns of slowing iPhone demand

Bloomberg

Apple Inc. shares had their worst day since 2014 amid concerns that growth in its powerhouse product, the iPhone, is slowing.
In the fiscal fourth quarter, Apple said iPhone unit sales barely grew from a year earlier, even though new flagship devices came out in the period. At the same time, Apple said it would stop providing unit sales for iPhones, iPads, and Macs in fiscal 2019, a step towards becoming more of a services business. While some pundits praised the move as a way to highlight a potent new business model, many analysts complained it was an attempt to hide the pain of a stagnant smartphone market.
The reduced disclosure “raises the specter of a sustained iPhone downturn,” wrote Nomura Instinet analyst Jeffrey Kvaal. He has a neutral rating on the stock and cut his price target to $185 from $215. Kvaal added that results in other Apple units “were also generally uninspired,” leading him to lower his earnings expectations for the next two years.
The stock slid 6.6 percent to $207.48 in New York, the biggest single-day decline since January 2014 and trimming the gains for the year to 23 percent. The decline helped push Apple’s market value to $987 billion, after it hit $1 trillion in August.
Apple has been praised for being one of the lone major technology companies to break out how many of each of its major products it sells each quarter. When iPhones were the hot new thing, like in 2015, it was easy for the company to tell investors it shipped 46 percent more of the devices.
Now, the smartphone market has matured and growth is harder to find. Global shipments fell 8 percent in the third quarter, compared with a year earlier, leaving the industry “effectively in a recession,” Strategy Analytics wrote in a research note after disappointing Apple results.
Reporting 90 days of unit sales no longer presents an accurate picture of Apple’s performance, Chief Financial Officer Luca Maestri said. Chief Executive Officer Tim Cook likened reporting unit sales of products to disclosing how many items are in a shopping cart at the grocery store versus how much the items cost.
Some analysts were unimpressed. “No one saw that coming. What are they hiding?” Neil Campling, head of tech, media and telecom research at Mirabaud Securities Ltd., wrote in a note to clients.
Others saw the change as a strong signal that Apple sees itself becoming more of a services business with digital subscriptions anchored to an installed base of more than 2 billion active users of its devices.
“Apple is trying to shift the discussion to services and recurring revenue, because the more recurring revenue, the higher your valuation becom-es,” Shannon Cross of Cross Research said.
Indeed, Maestri said the company will provide more data on its Services division, such as the cost of sales. That part of the business has been growing well, powered by iCloud and Apple Music subscriptions, app downloads, and iTunes video purchases. The company is working on digital newspaper subscriptions and original video content for next year.
Maestri said the company hasn’t given up on unit growth, but will focus on increasing revenue and maximising gross profit margins. Maestri and Cook also plan to provide relevant information during future earnings announcements.
Campling said that sounded like Apple will give commentary when it has good news, but not when things are bad. Still, the move is not without precedent. Apple has done it before, and other tech companies have, too — with differing results:
Before the Apple Watch went on sale in 2015, the company said it wouldn’t disclose unit sales. That product is slowly turning into a hit. Starting in 2013, Apple stopped breaking out Mac revenue into both laptops and desktops.
The latter product has faded in importance. The company stopped reporting iPod sales at the end of 2014.
That gadget became obsolete.