It's been nearly 16 years since the legendary launch of the first iPhone, which shocked the world in June 2007 and started a buying frenzy for Apple products. Throughout that time, the Silicon Valley giant has enjoyed almost exponentially growing sales of its flagship products, followed by record revenues, margins and hundreds of billions of dollars worth of share buybacks. Yesterday's launch of the new iPhone 15, however, did not bring another technological revolution. The changes from the previous version of the 'Apple phone' seem more cosmetic than groundbreaking. Also, the new Apple Watch did not shake up the world of new technology, despite a few 'gadget' features. Moreover, the new iPhone launch came at a time when the global economy is balancing on a thin rope, shying away from recession, in the era of strained Washington-Beijing relations. Will the launch of the new model prove to be another 'business success' for the company? Or perhaps a red flag that will show Wall Street the inflection point? After all, if something can't last forever - it has to end at some point.
Turbulence ahead?
The fact is that Apple combines (or has combined) the measures of a growth company (dynamic increases in sales, profits) and 'value' (fundamental 'quality', competitive advantages). The fundamental value of the Apple brand as a whole is underscored by the fact that its shares make up more than half of the portfolio of Berkshire Hathaway's investment vehicle, Warren Buffett. A wide business moat and consistent expansion of market share (with the acquisition of 'loyal' customers along the way) has made Apple a growing business, even in periods of elevated inflation. Skillful management, share buyback programs and rising multipliers - the company, in a word, 'commanded' quality and great results. 'Cheap' manufacturing in Asia supported its net margins. The iOS software became for many the benchmark of intuitiveness and quality (although to say it surpassed rival Android seems subjective).
With the rising tide, the market, positively surprised for more than a decade, has steadily convinced itself that this growth will continue for a long time. Perhaps even forever. Along with these expectations, the California giant's shares rose. Is it really so obvious? It would be a mistake to underestimate competitors, such as Samsung. Moreover, setting an ever-higher bar for Apple, after such impressive growth and successive increasingly 'exciting' product launches, creates the potential for disappointment. It seems adequate to compare the company's incredible era of several years of growth to a hurdle run, in which an athlete overcomes one obstacle after another - but with each successive obstacle he loses a little strength, which becomes more and more noticeable.
Year-on-year iPhone sales have been declining since 2021- will this decline accelerate? After adjusting for seasonality and risk factors, we expect the total number of models sold in fiscal 2023 to reach 221 million units, which is slowly approaching 2018 levels and is lower than the result achieved at least in 2015. It is worth noting that the iPhone has been the company's strongest product in recent years, and the decline in its sales is likely to be associated with a sharp drop in demand for its other products. Source: Bloomberg Finance LP, XTB Research
A conjunction of negative factors
It seems that if ever the dynamics of iPhone sales were to drop alarmingly, today's macro environment seems to be the 'best opportunity' for that. Admittedly, US households net worth is at a record high today ii according to the Federal Reserve at nearly $155 trillion. Also (despite economic slowdown in China), unemployment is not a problem for the company - in most major economies is very low. But the question is- will consumption persist at current level?
However, it is this macro situation that is likely to change in the coming months as central banks throttle inflation, suppressing economic growth. It seems that a harder hit on the labor market and wage growth is more a matter of time and scale. How will Apple deal with this? This is not the only problem and only the tip of the economic iceberg. High interest rates mean more expensive credit and higher installments. So far, a sizable portion of the company's products have been purchased through various forms of credit. What's more, credit tightening at banks (a higher bar for borrowers) and the problem of heavily indebted households eagerly borrowing at a time when interest rates were near zero... Also likely to affect sales dynamics. On top of that, there are geopolitical issues.
Strong friction is still evident between the U.S. and China, and the two sides are in a sense trying to break the thread of interdependence, which may allow them to escalate further. Apple is bearing the brunt of a gradual shift of production from China to neighboring countries in Asia. Chinese regulators just before the iPhone's launch banned Apple phones from being used by government officials. Morgan Stanley estimates that the ban means roughly 4% lower revenue this year. China accounts for about 20% of Apple's market but the question is rather whether... the Chinese ban will not be stretched in some way? The trade war is another reason why Apple is at a crossroads. This risk was not obvious for the previous dozen years of the company's operations.
Red flags?
It seems we've already seen the prelude to this story in Q2 results, which, despite impressive net income, indicated that demand for 'Apple' is no longer so brisk - especially lower sales affected iPads or Macbooks. Of course, Apple's high-margin services (TV, Pay, etc.) are performing very strongly, but let's remember... Their growth potential is somewhat limited by device sales - mainly iPhones. Demand for the iPhone, therefore, appears to be a kind of base for further growth. If it does not grow, or the measures prove highly unsatisfactory - the market may begin to see Apple as a company that has had its best '5 minutes'. After all, history knows many cases of great businesses reaching certain limits. It is also worth mentioning the cases of companies such as Xerox and Polaroid, which in their heyday were also 'condemned to growth'.
In July, the world's largest luxury conglomerate LVMH warned that demand for luxury products in the U.S. had begun a sharp decline. Of course, Apple is not a luxury brand, but in the world of technology it is undoubtedly regarded as such. So LVMH's warning seems serious although its direct impact on Apple's results this quarter - uncertain. Seasonally, however, Q3 (Q4 according to the company's fiscal metrics) often turned out to be the weakest one, and after iPhone launches, Apple's stock price at the close of the quarter turned out to be lower 75% of the time. According to Counterpoint Research, smartphone shipments in the global market in Q2 totaled 294.5 million, compared to 268 million in Q1. Apple held up the strongest against the competition. Shipments of iPhones totaled 45.3 million vs. 46.5 million previously (but still a lower figure).
Apple's pendulum
The positive factors that have fueled Apple's sales and business growth seem to be gradually depleting. However, we should remember that the market situation is influenced by myriad factors, including random ones, and the future is very difficult to estimate precisely. We may not know where what the future will be, but we should try to make a good determination of where we are. At the moment, Apple does not seem overvalued and the company is far from a 'crazy valuation' similar to Nvidia or other tech companies. However, it's hard to say that today's valuation is a 'margin of safety' in case of a recession, which could bring potentially dramatic changes in the number of devices sold. Of course Apple's growth cannot be written off, the bulls are eagerly awaiting the release of VR Vision Pro, which could 'reinvigorate' the virtual reality market. Also, further development of AI - if translated into new 'Siri' features could electrify the market.
The main changes introduced in the new iPhone model relate to USB-C connectivity, the camera (although the night mode photo in the presentation attracted controversy - the quality was questionable), the A17 processor and capabilities in the most powerful Pro versions. Will the 'snap your fingers' feature to check your pulse with the next-generation Apple Watch drive sales? Will gaming capabilities of new iPhone's improve sales enough? It's likely that regardless of the economic climate, Apple's business itself will defend itself. Even if its growth slows down or regresses. The question is, what will happen to the stock market valuation, which is primarily influenced by factors such as psychology - greed and fear? Here the doubts are increasing.
The markets clearly received the Apple event without fireworks - there is no talk of a technological breakthrough this time. After the presentation of the iPhone 15, Apple shares on the Nasdaq Exchange dipped nearly 1.5%.
Chart of Apple shares (AAPL.US), D1 interval. The first important support level in the downward scenario seems to be around $165 where we see the 23.6 retracement of the upward wave from March 2020 and the key average, theoritically defining the trend - SMA200 (red color). Source: XTB Platform
Eryk Szmyd XTB Financial Markets Analyst
