Apple share price: where next after earnings take a bite out of valuation

Apple guidance suggests holiday season could be a hit or miss

Apple’s guidance for the coming quarter has left many disappointed for numerous reasons. The company had set the bar high in Q1 of the recently ended financial year, when it posted 13% growth in revenue to $88.3 billion. That rate had accelerated markedly from the quarterly revenue growth in the immediate two years of just 3.3% and 1.7%.

With that in mind, Apple’s guidance for Q1 of its new financial year provides little insight as to where growth is headed. At $93 billion, the top end of its range, Apple would deliver 5.3% YoY growth, considerably slower than the year before but still a significant rate relative to recent years. On the other hand, at the bottom end of the range, at $89 billion Apple would be delivering just 0.8% YoY growth. That would be one of the slowest rates on record for the company and, amid the slowdown evident among others in the tech space, investors have rightly become wary that Apple may follow suit.

Apple pushes prices higher but growth slows in emerging markets

The disappointing guidance and slower growth has been pinpointed down to markets in emerging markets (EMs) including Turkey, India, Brazil and Russia. This has sparked concern that Apple’s pricing strategy - which has seen demand growing despite each new product or upgrades becoming ever more expensive – is about to be tested by less affluent economies.

Pricing is poignant. It has long been known that volumes were beginning to stagnate, but Apple has countered this with higher pricing: iPhone sales in the latest quarter came in flat from the previous year but revenue was up 29%. The most expensive version of its latest iPhone model, the XS, costs north of $1200 compared to the last three ‘Plus’ versions that all cost between $750-$850, and older models released before 2014 were mostly priced below $500. It’s not just iPhones either: the new MacBook Airs and both sizes of the recently released iPad Pros are pricier than their predecessors (as are the accessories such as the Apple Pencil and keyboard).

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Apple looks set to continue raising prices to capitalise on its loyal fanbase that has long been willing to pay a premium over rival products. The focus on the price, however, is intensifying after Apple revealed it will no longer report how many units it sells and only report revenue figures for each product category. The number of iPhones being sold has been one of the closest tracked figures in the sector and often used as a gauge of how the wider market – rivals and suppliers – are performing.

Why is Apple no longer reporting iPhone unit sales?

While Apple has many reasons to stop disclosing unit sales, stating a ‘unit of sale is less relevant today than it was in the past’ and ‘has not necessarily been representative of our underlying business’, many consider it a pre-emptive move ahead of falling volumes. It is worth noting that Apple is not becoming more secretive than the rest of the industry but is taking away figures that it voluntarily supplied at a time when rivals didn’t bother – Samsung doesn’t outline unit sales.

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It is evident that revenue growth is increasingly being driven by price and not volumes. Disclosing unit sales was how the market calculated the average selling price of iPhones and its other products but, with unit sales now hidden away, investors will have less data to play with and it will be harder to distinguish what’s driving revenue. Apple has already refuted claims that the move is in preparation for lower volumes, stating its intention is to grow unit sales for all its products. The annual change in unit sales of iPads was down 6% in the latest quarter and revenue fell 15%, while Mac sales dipped 2% but saw revenue rise 3%.

Reports Apple has scaled down ambitions for latest iPhone model

The Nikkei Asian Review reported that Apple has scaled back its ambitions for the iPhone XR, a more affordable model that was recently released, asking contractors to dedicate fewer production lines than originally agreed and warning a backup supplier that they will no longer be needed. This has obviously fed fears over future sizes and supports the argument that Apple has looked to mask lower volumes.

The report states two of its main phone assemblers, Foxconn and Pegatron, have been asked to halt plans to add more production lines while Wistron, signed up in case extra capacity was needed this holiday season, has been told it will no longer be required. The report suggests Foxconn alone will produce 100,000 fewer iPhones each and every day as a result: up to one-quarter less than first anticipated.

Apple switches focus from iPhone sales to user base and services division

Apple is right to state unit sales are less relevant the more it focuses on maximising value and margins, but removing these figures is also to its benefit because it can mask the average price of its phones. As it charges more for its products and improves margins, the more consumers will begin to question the value for money and concentrate on Apple’s relentless approach to pricing.

Aware of this, Apple’s transparency around its services division consisting of apps like iTunes, Apple Music, App Store and iCloud is set to open up as it becomes more secretive about how many products it is selling. Services revenue hit $10 billion for the first time in the latest quarter, up 27% from $7.9 billion the year before, accounting for 16% of total revenue.

Apple chief executive officer (CEO), Tim Cook, has often said the company’s future lies in services. This area of digital products and services offers superior margins to selling hardware, and introducing new digital offerings is a far easier way of diversifying than constantly creating the next breakthrough gadget. Some analysts predict that services boast a gross margin twice the size of hardware. While overall margins have remained steady and higher profits are driven by prices rather than volumes, there is still room for improvement on this front as Apple switches from hardware to software and services.

Unit sales figures are therefore being replaced by the gross margin figures released for the services division for the first time. This will first be reported in its next set of quarterly results, when Apple is likely to begin telling a new story of future growth and opportunity around services that builds on its recent revamp of its entire product line.

This new financial year is set to be Apple’s attempt to reignite excitement around the company’s prospects at a time when the overall attitude to big tech’s future growth potential has soured. Cook said the firm’s installed user base is ‘growing at double digits’ and described it as probably a ‘much more significant metric for us from an ecosystem point of view’. However, investors are still unsure as to how much detail will be dished out on the division in future reports.

Apple shifts to services in search of next phase of growth

Amid the broader slowdown emerging among other big tech companies, the mood of the market weighed to the downside potential following Apple’s latest results and guidance. Fears over lower volumes may be justified but Apple is proving it has reason to switch its focus to its faster growing and more profitable services business and looks set to open transparency in more valuable areas of the company while closing useful but not essential data that its competitors don’t provide anyway, even if that does allow it to mask its pricing strategy and volume performance.

At the bottom line, Apple is still delivering double-digit growth and stellar returns. Net profit was up almost one-third in the last quarter of 2018 to $14.1 billion and, having returned a staggering $73 billion in share buybacks over the last 12 months, its diluted earnings per share (EPS) jumped from $2.07 to $2.91. For the full-year, net profit rose to $59.5 billion from $48.4 billion with diluted EPS of $11.91 versus $9.21, with the dividend raised to $2.72 from $2.40.