Peak iPhone? Not so fast…

Analysts on Wall Street have declared: 2015 is the year the iPhone peaked!

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Apple’s stock has lost over $160 billion as analysts forecast a decline in iPhone sales.

Top analysts from Morgan Stanley (led by ultra-bull Katy Huberty), Stifel, Credit Suisse, JP Morgan, Baird, Pacific Crest and other investment firms have released reports over the last few days stating their belief that because of a weak demand for the iPhone 6S/6S Plus, Apple’s iPhone sales will drop for the very first time in the FY2016 and CY2016, for the very first time since the iPhone’s release in 2007.

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Huberty, the first analyst to sound the alarm, thinks that iPhone sales will drop by nearly 6% in FY2016 (equivalent to 2.9% in CY2016). More specifically, Huberty is convinced that Apple will only sell 218 million iPhones in FY2016 (a 5.7% drop), which is a rather steep decline from the 247 million she predicted previously.

What changed?

Although each firm gave different reasons*, they all revised their predictions downwards after a single event: Dialog Semiconductor, a company that earns more than 90% of its mobile revenue from Apple, recently brought down its Q4 revenue guidance from the range of $430m—$460m to the range of $390m—$400m because of an unexpectedly weaker demand in its mobile business.

*Credit Suisse’s reasoning is the most interesting of all, and it basically boils down to: since everyone’s got a smartphone already, it’ll be harder for Apple to sell more iPhones.

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If Wall Street’s smartest analysts are resting their predictions on the business of Dialog Semiconductor, then perhaps it is a good idea to ask if supply chain estimates are accurate.

The answer is (unsurprisingly?) a definite no.

Supply chains have historically been incredibly bad indicators of how Apple’s business is doing. It is safe to say that analysts pegging their predictions on the business of Dialog Semiconductor and “channel checks” are misguided and will ultimately be wrong.

Deriving product or revenue guidance from sources within the supply chain, or even an official statement from a supply chain operator, have led to disastrously wrong predictions in the past. There are a few examples of this from recent history:

Exhibit A: In June 2013, analysts downgraded Apple’s stock after “channel checks” showed a slowing demand for the iPhone 5s. A few weeks later, the company crushed expectations with its sales report.

Exhibit B: In October 2013, the Wall Street Journal reported that Apple had cut supply by about 20% at Pegatron and one-third at Foxconn. A few hours later, the Journal more or less retracted its story, and Apple did just fine that quarter.

Numerous people familiar with the thinking of Apple’s executives have also indicated that the “2015 peak iPhone” belief is one  which is not widely-held in the company. As growth slows, Apple is increasingly reliant on sales from the Greater China region and from Android converts, and have redirected some of its efforts to focus on maximizing its reach in these two areas. These early efforts (such as giving Android users an app to import all their data to a new iPhone) have been promising, and though it has yet to materially bear fruit, sales of the iPhone are not falling fast enough to concern the upper-management. Profits from iPhone sales account for two-thirds of all of Apple’s profits, but there is no need to sound the alarm and start taking drastic profits yet.

“It’s laughable,” one senior Apple employee told us, “[the analysts] have got it all wrong. Talk about a herd mentality.”

SAMSUNG IS (AND HAS BEEN) BOMBING While You’re Not Looking…

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While you’re not looking, Samsung has lost $44 billion in market value since April, marking the company’s worst streak since December 1983.

There are a couple reasons why Samsung’s stock has been absolutely murdered, but none is bigger than this: no one wants Samsung’s products anymore.

As it turns out, as hyped up as the product was in the media, no one really wanted Samsung’s latest line of Galaxy smartphones, bringing the stock down 8.1% this month alone (as a comparison, Apple’s stock fell only 6% during the market mayhem about a week ago — and this alone prompted Tim Cook to send an unprecedented letter to CNBC’s Jim Cramer to assure investors that Apple is fundamentally safe despite the widespread panic over China).

A large part of Samsung’s mistake was misreading consumer demand for the Samsung Galaxy S6/S6 Edge. As it turns out, customers wanted the three-sided S6 Edge more than the conventional looking S6 — and as a result, produced three times more S6 than S6 Edge… most of which are probably sitting in warehouses now.

Samsung also tried to one-up Apple by releasing the sequel to the S6 Edge (S6 Edge+) and Note 4 (Note 5) ahead of Apple’s September 9th event, where the company is expected to unveil the next-generation iPhones. Sure, that’s a great strategy and all, but there’s one big problem: Samsung’s most die-hard fans hated the products. They complained about the lack of a removable back, which means that customers will not be able to swap out additional memory or battery. Many even indicated that they were willing to jump ships across to iOS.

Samsung also priced its latest line of smartphones, by any definition, irrationally. The company is trying to compete with the iPhone – yet it has priced the S6 Edge+ and Note 5 higher than what Apple charges for the iPhone 6 Plus (a 64GB version of the S6 Edge costs $914.99 without contract, while a similar model of the iPhone 6 Plus costs just $849.99).

Here’s the one thing Samsung doesn’t seem to understand (and if they haven’t by now, will they ever?): The iPhone, with it’s tie-in to the iOS ecosystem, is a speciality product. It should be priced (and it is!) like one. On the other hand, Samsung’s Galaxy line of smartphones is a commodity. Every single Galaxy smartphone runs on Android, a software that just about any other smartphone manufacturer (apart from Apple) uses.

Samsung doesn’t have much to differentiate itself from the thousands of Android smartphones out there. Once an Android smartphone is “good enough” in terms of speed and quality, nothing else really matters other than the price. Why would anyone in the right mind buy a $900+ Samsung smartphone over a really well-made OnePlus, for just one-third of the cost?

Samsung thinks it can justify its high prices by copying Apple’s design, but fail to understand that people are often buying the iPhone for both the product and the ecosystem — an ecosystem that neither Samsung nor Android offers.

In fact, Samsung is getting clobbered exactly where all these cheap, yet beautiful Android smartphones are made: China. According to data provided by IDC, in Q1 of 2015, Samsung’s marketshare in China shrank by 53%. Comparatively, Apple’s increased by 62.1%. Behind Apple are the producers of the cheap and well-made Android smartphones, Xiaomi (up 42.3%) and Huawei (up 39.7%).

Here’s Samsung’s stunning free fall, illustrated in chart form:

samsung-loses-50-of-its-china-smartphone-market-sh-1431344174.06-4363879In an interview with Bloomberg, analyst Lee Seung Woo from IBK Securities Co. perhaps sums it up best: “We all know its smartphone business isn’t doing well… I can’t really figure out when the stock will stop declining. The fundamentals look problematic.”

INVESTORS WARN: A “Death Cross” Is About To Strike Apple…

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The markets are in a bloodbath, and Apple’s stock is in the gutter.

Reports have indicated that Apple’s stock is now officially in the bear market (the stock plunged 16%, then another 6% in a single day — it closed the week after falling more than 20% from its 52 week peak).

Things could, however, get much worse for Apple.

Investors have been warning of a “death cross” in Apple stock movement, which foreshadows a much steeper decline in the close future. As MarketWatch reported, the last time the “death cross” struck Apple, the company’s stock dived 27% over the next four months.

What happened the last time a
CHART: What happened the last time a “death cross” struck Apple… | Source: MW
While it’s true that a company’s stock price is rarely affected by the company’s operations as much as it is by market reactions, in the case of Apple, there are some definitive reasons as to why investors are bearish about the stock.

Here are the five biggest…

1. China 

China’s market is in a free fall, and we’ve seen huge sell-offs in the Chinese stock market. Much of Apple’s current success is dependent on the health of its Chinese business — in fact, 26.4% of the iPhones (Apple’s most profitable product, by far) the company sold in Q2 of 2015 was in China.

However, as important as the Chinese market is to Apple, it’s not one the company can count on reliably: demand spikes each time Apple releases a new product, but tanks almost immediately after. Case in point: the release of the iPhone 6 gave Apple a huge boost in China in Q4 of 2014 but Apple’s shares of all smartphone sales fell drastically the next quarter.

Due to ongoing concerns in the Chinese market, firms such as Cowen has downgraded their outlook on Apple from “Outperform” to “Market Perform”.

Apple China Marketshare iPhone

2. Can’t milk the iPhone 6/6 Plus anymore

The iPhone 6/6 Plus is at the end of its product cycle. With the next-generation iPhone 6S/6S Plus due next month, no one’s buying Apple’s most profitable product any longer. Investors know this, and therefore aren’t expecting much growth in the near future, at least until the next-generation iPhones are released.

The next-generation iPhones is said to come with a 12MP camera capable of 4K recording, a pressure-sensitive Force Touch display, an entirely new wireless chip and a bunch of other incremental improvements, all in the same form factor as the current generation of iPhones.

According to WSJ, Apple is stock-piling 90 million units for the launch.

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Leaked image of the iPhone 6S shell indicating a much faster and battery efficient wireless chip | Source: 9to5Mac

3. Mystery over the Apple Watch

How well or poorly is Apple’s latest product line doing?

No one knows.

The company declined to release any indication as to how the Apple Watch is doing in its latest earnings report, apart from giving the usual “better than expected” boilerplate without any figures to back the claim up.

Since its launch, the Watch has received mixed reviews, and although Apple — to its credit — is rectifying the situation rapidly with the imminent release of WatchOS 2,  no one really knows how much the fix is going to affect sales directly (probably not much, if at all). Sure, Apple is leading in the smartwatch category, but at the same time no one really knows how big or small the smartwatch market opportunity is.

CHART: The Watch is clearly beating all its competitors, but... | Source: BI
The Watch is clearly beating all its competitors, but nobody knows how big the market opportunity is… | Source: BI

4. Apple Music, another new product category, is failing

When a recent report from music industry research company MusicWatch found that 48% of the 5,000 participants surveyed who had tried out Apple’s new music streaming service had stopped using it, Apple rebutted the figure quickly: only 21% of users who had tried the service defected, the company said, almost half less than the initial number reported by MusicWatch. On the face of it, Apple’s rebuttal might’ve silenced some of the company’s skeptics… but look at that figure again: 21% decided that, for some reason or another, Apple’s latest product offering isn’t suitable for them.

This isn’t the perfect analogy, but imagine if, one day, Apple releases a new physical product and after purchasing it, 21% of its customers decide to return the product.

It would’ve been a disaster for the company.

Sure, 21% is better than 48%, but in the grand scheme of things, it’s not encouraging by any means.

All the hurdles Apple will have to overcome isn't exactly encouraging... | Source: Statista
All the hurdles Apple has to overcome in order to dominate isn’t exactly encouraging… | Source: Statista

5. Everything is a disaster, and Apple is just a victim

Apple is one of the few big-name and closely-watched stocks getting crushed by the market correction, and the deep dive in stock price can be attributed to what happens in the late stages of bull markets.

Investors could also be selling off Apple stocks in anticipation for an underwhelming future product line, or as a reactionary measure against the floundering stock market (in other words, in panic).

Either way, these aren’t things the company can control.

Apple is a victim of the panic in the stock market... |Source: CNBC
Apple is a victim of the panic in the stock market amid corrections… | Source: CNBC

These Two Sentences Will Explain Why Apple Will Not Rally Like Google Did Last Friday

Per Bloomberg, last Thursday’s report “marked the first time since 2013 that Google has announced quarterly adjusted earnings per share higher than expectations.” The market responded accordingly, rallying Google’s stock to an all-time high of $699.62 (a 16% increase), and provided 39 points of the Nasdaq Composite Index’s 47-point gain for the day. As Walter Todd, CIO of Greenwood Capital Associates LLC puts it, “It’s a good feeling. The move in market cap is just insane.”

Now investors are wondering… can Apple repeat the same magic Google performed?

Once the market closes today, Apple is going to report earnings for its fiscal Q2 — the period covering April, May and June. Almost all signs point to a no.  To understand why, take a look at this Fortune article. More specifically, these two lines…

Google’s rally was sparked by quarterly earnings that beat Wall Street expectations for the first time since 2013.

Apple’s earnings have exceeded the expectations of Fortune‘s panel of Wall Street analysts eight quarters in a row.

What happened with Google was an anomaly. But with Apple, anomalies happen so frequently that it becomes normal — Apple is expected to outperform the expectations of Wall Street analysts anyway. So even if Apple exceeds their expectations today, it’ll just be another normal, boring earnings report.

BUT… there are a couple things that could push Apple’s stocks up today (albeit not as much as what happened with Google) … and these are the numbers investors are looking at closely.

iPhones: Apple is now an iPhone company. Revenue generated from everything else they do and sell are nothing more than rounding errors for the company.

Analysts are expecting Apple to sell 49.4 iPhones this quarter — a 40% growth (!) annually on a quarterly basis.

Apple should have no problem beating these expectations: since the release of the iPhone 6 and iPhone 6 Plus, Apple has blown all demand and delivery expectations out of the water. In fact, if Apple can prove that there’s still a strong demand for the current generation iPhone 6 and iPhone 6 Plus before the newer generation comes out sometime in September, it has the potential to positively affect Apple’s stock price even more.

The entire iPhone line is quite a miracle: it’s a $154 billion business that not only has the potential to, but does grow 40% annually without ever having to lower its profit margins. A report recently emerged highlighting Apple’s insane profit margins on these iPhones: even though the company only has 20% of the sales in the smartphone industry, it’s taking 92% of the profits.

Apple Watch: Apple’s newest product line went on sale at the end of April, which means that Apple will have to report earnings on it for the first time ever.

Due to competitive reasons, Apple will not report its Watch sales as an independent category, and instead will lump it with all the “other products”. The “other products” category is usually comprised of iPods, Apple TVs, Beats Electronics, and other accessories.

All the “other products” did $1.7 billion in revenues last quarter — it’s up to the analysts to figure out how much of the difference this quarter versus last quarter in the “other products” category is due to the Watch sales.

This is what revenues from the “other products” category currently look like (via QZ)

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The Watch is an entirely new product line for Apple, which means one thing: analysts really don’t know what to expect.

So here’s how they’re going to decide if Apple is performing well on the Watch sales or not: if revenues for the “other products” are much higher for this quarter than it was for last quarter, then Apple crushed it. If revenues are the same or only experience a slight bump, then Apple bombed it.

Indicative measures: These are the usual big numbers everyone is paying attention to that will indicate if Apple is doing well or not (via B.I.)

  • Revenue: $49.22 billion, via Yahoo Finance (would be growth of 31.5%)
  • EPS: $1.80, via Yahoo Finance (would be growth of 41%)
  • iPhone units: 49.4 million, via Fortune (would be growth of 40%)
  • Gross Margin: 39.5%, via Gene Munster of Piper Jaffray
  • Revenue guidance: $50 billion, via Gene Munster of Piper Jaffray

Everyone will be able to listen in on Apple’s post-earnings conference call with analysts at 5 p.m. ET (2 p.m. PT) today. Here’s the link.

BURIED: The Biggest Hint From Apple That It’s Making A Car

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Apple just had an amazing quarter of earnings.

The company, overall, is in great shape in the hands of its CEO, Tim Cook.

The Verge noted in an article that “Tim Cook’s Apple is now worth twice as much as Steve Jobs’ Apple three years after his death, with enough cash to buy all 319 million Americans a $599 stainless steel Watch.”

Here are some numbers from the earnings report, just so you could see how much Apple blew expectations out of the water…

Data compiled by Bloomberg:

  • EPS: $2.33, up 40%, versus $2.16 expected
  • Revenue: $58.01 billion, up 27%, versus $56.03 billion expected
  • iPhone units: 61.2 million, up 40%, versus 58.1 million expected
  • iPhone ASP: $658.53
  • iPad units: 12.62 million, down 23%, versus 13.6 million expected
  • iPad ASP: $430
  • Mac units: 4.56 million versus 4.7 million expected
  • Gross margin: 40.8% versus 39.5% expected
  • Q3 revenue forecast: $46-$48 billion versus $47 billion expected
  • Cash on hand: $194 billion

A table from Apple with all the key product units broken out…

We’ve lightly annotated it to highlight some important points:

Click to zoom in.
Click to zoom in.

Now, these results are great – amazing, in fact.

Apple shareholders love the company now more than ever before.

BUT, we think there’s something very important that Apple included in their earnings report… which the company may or may not have intentionally buried: the fact that Apple’s research and development expenditure had increased 35% from last year.

In the earnings call with analysts, Apple’s CFO Luca Maestri even said that Apple has got no plans to decelerate the company’s outsized R&D budget (emphasis ours):

Katy Huberty from Morgan Stanley: R&D well ahead of revenue, what is driving that? Bigger bets?

Luca: We said several times, look at current product portfolio, we now develop two iPhones, two iPads, we have Apple Watch, we are also developing some core foundational technologies. Also spending ahead of products that generate revenue. When you combine, that is why you see R&D increases year over year. Innovation is core of company. Look at last 2 quarters, revenue growth higher than OP EX growth. Expense to revenue ratio lower than a year ago, some thing we consider competitive.

Make no mistake here: company R&D expenditures don’t just increase 35% over the course of a year, unless it is trying to build an entirely new product category – one that it never had experience building before.

In the case of Apple, that could only mean one product: the Apple Car.

The Car, currently codenamed “Project Titan” within Apple, is rumored to be the company’s first foray into the automobile industry (hardware-wise, excluding Apple’s own CarPlay software), and will feature an electric powered vehicle that takes on the shape of a minivan. Other rumored features include a self-driving mechanism, as well as innovations that would, according to an employee, give “Tesla a run for its money.”

The project is currently led by Apple’s VP of Product Design Steve Zadesky, who, according to earlier reports, has Cook’s permission to recruit as many as 1,000 employees (most of them already working at Apple) for the project. According to Bloomberg‘s Tim Higgins, Apple plans to release the Car in 2020, following a five year development period.

So, there we have it: the reason why Apple’s budget increased 35% y/o/y.

Of course, nothing is confirmed at this point – Apple may even scrape the entire project at the last minute.

But there’s no denying that something huge – revolutionary – is going on at Apple now.