Apple lost as much as Baidu in 5 days, Cook should wake up

In China, Apple rarely invites celebrities to advertise or endorse its mobile phones. But this year, it made an exception. Faye Wong's daughter, singer Dou Jingtong, born in 1997, was invited to shoot outdoor advertising posters for Apple mobile phones. For the godlike Apple, this is not the only "exception" since 2018.

Apple will release its quarterly earnings report on May 1, Eastern Time, and the historic slowdown in the global smartphone market has also hurt Apple phones, which has attracted more attention from the outside world to Apple's new earnings report. In the five trading days ending April 25, Apple's stock price fell by 9%, and its market value evaporated by as much as $80 billion. As of April 25, Eastern Time, Baidu's market value was $80.391 billion. This means that Apple has lost the equivalent of Baidu's market value in five trading days.

The historic difficulties encountered by Apple phones have had a chain reaction throughout the industry chain. On April 23, European chipmaker AMS issued a "warning" that its performance would decline due to weak orders from one of its major customers. AMS did not disclose the name of the customer, but analysts estimated that half of AMS's revenue comes from Apple.

According to Reuters, on April 24, Daniel Ives, an analyst at market research firm GBH Insights, said in a client report that he expects Apple's iPhone shipments to be 212 million units in fiscal 2018, lower than the previous estimate of 221 million units. Joel Kulina, a senior trader at Wedbush Securities, said that when talking about the decline in iPhone shipments, the existing expectations may not be low enough, "there is still no visibility, which will keep a lot of investment funds on the sidelines."

Michael Walkley, an analyst at Canadian investment bank Canaccord Genuity, said the iPhone X was not a failure, but "it was a little disappointing" relative to previous iPhone upgrade cycles.

Taiwan's world's largest chip foundry, TSMC, is also a supplier of Apple phones. Bloomberg reported that TSMC's outlook for operating profit margin and revenue in the second quarter of 2018 were both lower than expected. Although TSMC has benefited from the growth of orders from new customers, such as digital currency mining customers who need powerful chips, it still faces the dilemma of slowing demand from smartphone manufacturers. The Hsinchu-based company is now going further to win customers, focusing on orders for high-performance computing processors, automobiles and the Internet of Things.

The report from Bloomberg also revealed that Apple's most expensive phone, iPhone X, has difficulty attracting customers in emerging markets, while competitors Huawei and Xiaomi are aggressively launching more cost-effective phones to dominate the Chinese market, which is Apple's largest overseas market. After reaching a peak in revenue at the end of 2017, the revenue of five major Apple assembly plants, including Hon Hai and Pegatron, slowed down sharply, indicating that demand for the high-priced iPhone X may ebb after only one quarter of its launch. Based on past historical experience, this is a precursor to Apple's decline.

Everyone knew that Apple Inc. was changing, except Apple itself.

Apple executives have been coy about major technology trends and how they affect Apple. At least for now, it seems that the growth of the smartphone market has disappeared, which is a big trend. Most consumers now have at least one smartphone, and the time between upgrades is getting longer and longer. In many countries, consumers are either iPhone or Android, and few people are defecting.

As a result, sales of new smartphones have stalled around the world, and Apple is no exception. Investors know this. Analysts on average expect Apple to sell 3% more smartphones in fiscal 2018 than in fiscal 2017, and 1% more in fiscal 2019. Such slow growth is bad for Apple’s business, but revenue growth is expected to accelerate in 2018 thanks to price increases and new product launches. Analysts repeatedly cut their sales growth expectations ahead of Apple’s fiscal second-quarter earnings report on May 1. They also presciently made similar cuts ahead of Apple’s December 2017 results.

Loss of motivation

Apple's iPhone sales are expected to decline or grow slowly for four consecutive years.

The English meaning of the upper left corner of the chart is iPhone sales (unit: million units) Note: Apple's fiscal year ends in September. According to Nomura Instinet, the data for fiscal years 2018 and 2019 are the average expectations of analysts Source: Bloomberg and Nomura Instinet (2018 and 2019 fiscal year expectations)

It’s time for Apple to stop being polite and get serious. In reality, the era of easy growth of the iPhone, Apple’s main source of revenue, is over. If Apple wants to regain its glory, it can broaden its revenue channels by raising prices and launching more products, further opening up Apple users’ pockets through music and news subscriptions, application downloads, etc. However, there are risks and uncertainties in changing the foundation of the business model in this way (of course, it is not impossible). Since Apple’s stock price remains at a historical high, its stock price may not reflect possible shortcomings.

These views, while pessimistic, are true. In contrast, Apple executives have ignored the facts about the broader changes in the smartphone market and have not considered how Apple should change to respond to these new realities.

Slowing growth

Smartphone sales declined in 2017 and are expected to grow at a relatively slow pace in the coming years.

In an August 2017 conference call with stock analysts, an Apple executive asked CEO Tim Cook: Can Apple sell more iPhones in the coming years, given the current sluggish smartphone market? Cook said that in his view, there is a lot of potential to sell more phones to consumers who already own an iPhone or an iPhone competitor, as well as consumers who have never bought a smartphone. This answer was fine until 2015, because everything Cook said was true. But now it is different, and Wall Street's sales expectations for the iPhone show that investors are not buying Cook's words.

IDC predicts that smartphone sales will decline by 0.5% in 2017 and will grow at a compound annual growth rate of 2.8% over the next five years. One reason for the stagnation in smartphone sales is that consumers in many countries are taking longer to replace their old phones. Apple did not foresee this change in the market.

Lower expectations

Stock analysts have been lowering their revenue forecasts for Apple in fiscal 2018. The average Wall Street forecasts for different points in 2018 are as follows (in billions of dollars):

In a conference call with analysts in February 2018, Cook said that consumers in some countries were waiting longer to upgrade their phones. But he also said that the speed at which consumers upgrade is not "something we should pay too much attention to." This answer is very surprising because most of Apple's new iPhones are bought by old iPhone users, and the frequency of consumer phone upgrades is crucial to Apple's sales.

Privately, Apple must have realized that the smartphone boom is over. That's why Apple keeps emphasizing "device activations" (the number of Apple devices in use worldwide). In February, Apple said it had 1.3 billion device activations. By emphasizing this number, Apple can temporarily guide investors to forget about the lackluster growth in iPhone unit sales and outline a prospect that will make investors happy: as long as existing Apple device users are persuaded to buy more apps, subscribe to existing and future Apple products, and add-ons such as the HomePod smart speaker, then the financial picture will be impressive!

price

Apple is not expected to see a significant increase in iPhone sales in 2018, but price hikes are likely to boost iPhone revenue. Here are the year-over-year changes in iPhone revenue and unit sales:

The two words in the upper left corner of the chart refer to "iPhone revenue" and "iPhone unit sales" from left to right (Note: Apple's fiscal year ends in September. According to Nomura Instinet, the 2018 fiscal year data is the average analyst forecast) Source: Bloomberg and Nomura Instinet (2018 fiscal year forecast)

It would be wise for Apple to explain why device activations are important, how the company plans to further open up users' wallets, and how its financial situation would change if it reduced its reliance on iPhone sales.

Maybe executives aren’t obligated to tell us the shocking truth (like “we’re trying to compensate for the natural stagnation of the *** market”), but doing so would be refreshing and buy Apple more time to move into its next big product category (be it electric cars or something else). Apple’s approach is smart: expanding the iPhone business by adding ancillary products and trying to raise the price of smartphones. The strategy is so smart that Apple’s silence seems even more strange.