Weak iPhone signals will keep Apple shares capped

Apple is still the world’s biggest company measured by market-capitalisation.

But it is now slightly smaller, after its stock last year marked a first annual decline since 2008.

Shares of Cupertino, California’s most famous resident tumbled more than 25% from 2015 highs and were already down more than 10% in 2016 at Monday’s close.

These falls have taken the stock below $100 for the first time in 15 months.

It’s more than a psychological milestone for many investors.

Not just because of the symbolic $100 handle, but also because the last time Apple traded below that threshold, its stock was discounted of its own volition.

That time was after Apple’s most recent stock split, on 9th June 2014.

The shares were split into fractions of $645, worth $94 apiece.

Apple still gained 39% in that year, backing hopes of enthusiastic investors that the new units could richen back to higher values before too long.

Now those hopes look like they could take a while longer to realise, at best.

News from Taiwan

Reasons for investors to turn cautious on Apple’s outlook have been persistent.

Chiefly, there’s been a steady stream of major Apple suppliers in Asia warning their quarterly sales will not meet expectations.

They include Taiwan Semiconductor Manufacturing, the world’s biggest contract chipmaker, and another engineering firm based on the island, lens maker Largan Precision Co.

Other suppliers reportedly said Apple had cut notice of orders to as little as one month, instead of the three before.

While it’s worth remembering Apple has continually stressed that supply chain data does not provide an accurate reflection of its outlook, investor reaction to these indications has been understandable.

That Apple’s best-known Taiwanese partner, Foxconn, which assembles most iPhones, made an unprecedented cut of working hours for a major holiday recently, has not helped perceptions.

iPhone sales: weak signals

At the crux of concerns is that if indications turn out to be correct, Apple could report its first annual decline in iPhone sales since it launched the product almost 10 years ago.

Uncorroborated but credible reports suggesting Apple might slash production of its most recent iPhone series, the 6S and 6S Plus, by 30% this quarter, have backed a weakening outlook.

The Asia-centric backdrop of Apple’s souring outlook does of course have a wider context, at least in investor perceptions.

China’s now undoubtable economic slowdown has raised the fear that the huge volumes of new iPhone users that brought record sales in 2014, may not recur for years.

Finally, investors also fear Apple’s innovative streak—and profits it generated—may be coming to an end.

It’s been years since Apple launched a truly innovative product that became profitable relatively quickly. (See iPad).

This has reminded investors that despite the diversity of Apple products, in principle it remains exposed given that the iPhone is its biggest revenues generator

 APPLE REVENUE BREAKDOWN 2015

iPhone mod cycle

All the above said, it is clearly possible investors are being too pessimistic.

On the matter of iPhone sales, given that Apple has adopted a ‘modified’ two-year cycle for iPhone models, sales growth will track those cycles to a large degree.

Brand-new models are followed by different iterations of previous models.

In the same way the iPhone 5 outsold its follow-up, the 5c, the Apple handset which evinced the biggest leap in recent years in technology and sales, was iPhone 6/6 Plus, and not the more recent 6s series.

Sales growth differentials were 5% for 5c and 30% for the original iPhone 6.

What are the chances that the iPhone 7 when it is released (probably in September 2016) will not be another blockbuster?

Furthermore, whilst investors have recently seized on data from research firm IDC, showing the global smartphone market expanded by just 10%—compared with 4 times that in prior years— some perspective is needed.

We know the shrinkage at least partly describes the expanding dominance of the biggest smartphone brands, Apple and Samsung, and operating systems associated with them, iOS and Android respectively.

App growth in store?

As for the issue of diversification, investors needing further reassurance may simply look at the App Store.

Apple said earlier this month its App Store revenues were a record $20bn-plus in 2015.

The business was actually slowing after newer app-bearing devices—likes Apple TV and Apple Watch— were launched.

30 cents of every dollar of App Store transactions goes to Apple, the rest goes to independent software developers.

Therefore, $6bn in Apple revenue last year was from the App Store.

It was a relatively small fraction of the $233bn in sales and $53bn net income Apple booked last financial year.

But the record app sales still highlight the growing, and possibly overlooked financial importance of apps for Apple.

Apple hasn’t consistently disclosed store figures.

We know it sold $10bn in apps in 2013 and that they grew 50% a year after, suggesting $15bn in 2014, and a clip of about 40% last year.

New record, slower pace

Moving to the all-important forecasts, whilst growth in the key iPhone category is expected to have slowed in Q1 2016, record sales are still expected.

Almost up-to-the-minute forecasts indicate 76.5 million iPhones were sold in the quarter that ended on Boxing Day, compared with 74.5 million in Apple’s ‘holiday’ quarter of 2014.

That would be an uptick of 2.7% compared with the leap of 46% year-on-year in Q1 2014.

So the biggest-ever sales tally is forecast tonight, but at the slowest-ever rate.

Apple is also expected to forecast slower sales in the quarter that is set to end in March.

If correct, that would represent the first time Apple handset sales would fall since the iPhone was launched in 2007.

Current forecasts point to 54.6 million iPhones for Q2.

Apple sold 61.2 million between January and March, 2015 up 40% year-on-year.

Earnings growth skids

Financial figures will also grow, but again, perhaps not at the rate which the market has become accustomed to from Apple.

Consensus for EPS straddles a tight range between $3.24 and $3.27.

Revenue expectations are as high as $77.138bn but not lower than $76.358bn.

Growth would be 7% and 4% for EPS and revenue respectively at the most.

That compares with an almost 30% annual rise in revenues in the same quarter a year ago, and a 48% rise year-on-year in EPS.

Whilst Apple has beat Wall Street’s financial forecasts in every quarter for the last three years, doing so in a way that boosts its stock materially this time round may be a big ask.

The scale of the task facing Apple during the last quarter may partly explain why the gradient of its stock’s descent since November, cannot be regarded as constructive

The stock fell as much as 24.5% during that time between 4th November and last week.

Technical divergence between price and Slow Stochastic indicator—the price is setting lower highs even as the momentum study rallies—may turn out to be neutral at this stage.

The daily picture looks bereft of strong trends—apart from one depicting a rather frantic rate of attrition.

The cleanest retracements still appear to be referenced off the stock’s 2015 trading high on 28th April—a post-stock-split high of $134.54.

The shares respected the kick-back low that followed on 24th August (c. $92) again last week, when they came within $1.40 of the said figure.

At the same time, 38.2% ($108) and 61.8% ($118.2) of the decline from last year’s peak supported and largely capped the stock  between late August and mid-December.

Therefore whilst the chances of Apple stock breaking below $90 seem on the remote side for now, trade above $108 seems equally remote for the foreseeable future.

DAILY CHART

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Apple’s weekly chart, at least corroborates the view that the stock is within the influence of long-standing support in the shape of its 200-week moving average.

Prices—again adjusted for the split in June 2014—have yet to trade below the threshold.

WEEKLY CHART

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This article will be updated after Apple’s Q1 earnings have been released.