That may be true, but Apple is losing out to its smartphone rivals. It recently fell to third place in the global smartphone market, according to IDC. In the third quarter of 2018, Huawei took over the number two spot — expanding its market share to 14.6% — while Apple controlled 13.2% of the smartphone market globally. Samsung continues atop the leader board, according to IDC.
If that’s not bad enough, Apple’s suppliers are cutting back on their operations — meaning that the supply of Apple’s “extraordinary product” exceeds the demand for it.
And then there’s the massive hole left in Apple’s profit pool that can’t be filled by the oft-touted services business.
Since November 2 — when I wrote about three reasons to sell Apple stock — here are five new ones.
(I have no financial interest in Apple securities).
How so? As the Wall Street Journal reported November 19, in recent weeks, Apple slashed production orders for all three of the iPhone models it unveiled in September 2018. The worst cuts came in forecasts for the iPhone XR, a lower-price model — the XR’s production was slashed by about 33% to 70 million units.
Someone at Berkshire should have done their homework because iPhone sales have been shrinking since their 2015 peak. Since then, the Journal reports, annual iPhone sales have fallen 6% a year to 217.7 million units.
And each of those suppliers cutting back offer four of five fresh reasons to sell Apple stock before it falls further.
Workers are bolting Foxconn. The Journal reported that workers are leaving Foxconn’s Chinese plants “earlier than they intended [by the thousands] after Foxconn cut overtime hours that typically are available during peak production periods.”
And Foxconn is slashing costs. On November 21, Bloomberg reported that Foxconn, Apple’s biggest iPhone supplier, is suffering a “difficult and competitive year” and plans to cut $2.9 billion from its costs in 2019. Foxconn plans to reduce iPhone costs by $870 million and reduce non-technical staff by 10%.
Oorvo, Lumentum Holdings, Japan Display
Last week iPhone components suppliers Qorvo, Lumentum Holdings, and Japan Display cut their quarterly profit estimates. In so doing, they cited a reduction in previously placed orders from a large customer — while Apple wasn’t named, “it accounts for a third to half of revenue for these companies, according to financial filings and estimates,” according to the Journal.
Services can’t pick up the slack
The fifth fresh reason to sell Apple stock is that if current trends continue, there is no way for services to pick up the slack from declining iPhone sales.
If you’re wondering why, look at Apple’s fourth quarter 2018 financial report. That’s where you’ll find that iPhone sales hit about $37.2 billion — up 29% from the year before despite unchanged unit volume from the year before.
That is about 3.7 times bigger than Apple’s services revenue which reached about $10 billion in the quarter — up 17% from the previous year — growing far more slowly than iPhone sales.
If those growth trends continue, there is no way for services to get as big as iPhone sales.
But if you compare iPhone and services revenues assuming that they keep growing at the same rate as they were for all of Apple’s fiscal 2017, things look better for the Apple services bulls.
How so? In fiscal 2017, Apple generated about $141 billion in iPhone sales and nearly $30 billion in services revenue — up 3% and 23%, respectively from the year before. If those growth rates continue unchanged, by 2026, services will surpass iPhone sales — with $193 billion to $184 billion in 2026 revenues, respectively.
Are these assumptions realistic? It is certainly conceivable that Apple could convince iPhone owners to spend far more money on services than they do now, but that would require Apple to increase its services revenue per iPhone sold — assuming that iPhone unit sales grow at 2% a year as they did in 2017 — over five-fold from $138 to $745.
However, if iPhone sales decline at a 6% annual rate — as the Journal suggested they have been — then the services revenue needed to pick up the slack from falling iPhone revenue would be a whopping $1,556 per new iPhone sold.
With Apple’s plans to hide its iPhone results, we will never know how this turns out. After 11 years, can Apple invent a new product to pick up the slack from its last extraordinary product? Warren Buffett is betting it can.