Will the iPhone 15 really be a success for Apple?
Industrial objectives and scenarios between technology and finance for Apple after the presentation of the iPhone 15. Analysis by Walid Koudmani, chief market analyst of Xtb, and Eryk Szmyd, financial markets analyst of Xtb (international fintech listed on the Warsaw Stock Exchange)
It's been almost 16 years since the legendary launch of the first iPhone, which shocked the world in June 2007 by sparking a buying frenzy for Apple products. Throughout this time, the Silicon Valley giant has enjoyed near-exponential growth in sales of its flagship products, followed by record revenues and margins and hundreds of billions of dollars in stock buybacks.
Yesterday's launch of the new iPhone 15, however, did not bring another technological revolution. The changes compared to the previous version of the 'Apple phone' seem more aesthetic than revolutionary.
Furthermore, the new Apple Watch has not revolutionized the world of new technologies, despite some "gadget" features. Furthermore, the launch of the new iPhone came at a time when the global economy is teetering on the edge, shying away from recession, in the era of tense Washington-Beijing relations.
Will the launch of the new model prove to be another commercial success for the company? Or perhaps a signal that will show Wall Street the inflection point? After all, if something can't last forever, it has to end sooner or later.
TURBULENCE IN VIEW?
The fact is that Apple combines (or has combined) measures of a growing company (dynamically increasing sales, profits) and “value” (core “quality”, competitive advantages). The fundamental value of the Apple brand as a whole is underlined by the fact that its shares make up more than half of the portfolio of Berkshire Hathaway's investment vehicle, Warren Buffett. A wide commercial moat and steady expansion of market share (with the acquisition of “loyal” customers along the way) have made Apple a growing business, even in times of high inflation. Wise management, share buyback programs and increasing multipliers: in a word, the company has "commanded" quality and excellent results. “Cheap” manufacturing in Asia supported its net margins. iOS software has become the point of reference for many in terms of intuitiveness and quality (although saying that it has surpassed its Android rival seems subjective).
With the general situation, the market, which has been positively surprised for more than a decade, has firmly convinced itself that this growth will continue for a long time. Maybe even forever. Along with these expectations, the shares of the Californian giant have increased. Is it really that obvious? It would be a mistake to underestimate competitors, such as Samsung. Furthermore, setting the bar ever higher for Apple, after such impressive growth and successive increasingly “exciting” product launches, creates the potential for disappointment. It seems fair to compare the company's incredible growth period, which lasted several years, to an obstacle course, in which an athlete overcomes one obstacle after another – but with each subsequent obstacle he loses a little strength, which becomes more and more evident.
A COMBINATION OF NEGATIVE FACTORS
It seems that if iPhone sales momentum ever drops alarmingly, today's macroeconomic environment appears to be the “best opportunity” for it. In fact, according to the Federal Reserve, U.S. household net worth is now at a record high of nearly $155 trillion. Furthermore (despite the economic slowdown in China), unemployment is not a problem for the company: in most major economies it is very low. But the question is: will consumption persist at its current level?
However, it is precisely this macro situation that is likely to change in the coming months as central banks reduce inflation, suppressing economic growth. It appears that a harder hit to the job market and wage growth is more a question of timing and scale. How will Apple deal with this situation? This is not the only problem and just the tip of the economic iceberg. High interest rates mean more expensive credit and higher payments. So far, a considerable portion of the company's products have been purchased through various forms of credit. Furthermore, the credit crunch of banks (a higher level for borrowers) and the problem of highly indebted families taking out loans at a time when interest rates were close to zero… Will also likely affect sales dynamics. Added to this are geopolitical issues.
Strong friction between the United States and China is still evident, and the two sides are in a sense trying to break the thread of interdependence, which could allow them to escalate further. Apple is bearing the brunt of a gradual shift in production from China to neighboring countries in Asia. Chinese regulators shortly before the iPhone's launch banned the use of Apple phones by government officials. Morgan Stanley estimates the ban will mean a reduction in revenue of about 4% this year. China accounts for about 20% of Apple's market, but the question is more like… will the Chinese ban be extended somehow? The trade war is another reason why Apple is at a crossroads. This risk was not evident in the previous twelve years of the company's operation.
WARNING SIGNS?
It seems that we have already seen the prelude to this story in the second quarter results, which, despite the impressive net profit, indicate that the demand for “Apple” is no longer so lively – in particular lower sales affected iPad or Macbook. Of course, Apple's high-margin services (TV, Pay, etc.) are doing very well, but let's remember… Their growth potential is somewhat limited by device sales, primarily iPhones. The demand for the iPhone therefore seems to be a kind of basis for further growth. If it doesn't 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 large enterprises that have reached certain limits. It is also worth mentioning the case of companies like Xerox and Polaroid, which in their heyday were also "doomed to growth."
In July, the world's largest luxury conglomerate, LVMH, warned that demand for luxury products in the United States had begun a sharp decline. Of course, Apple is not a luxury brand, but in the world of technology it is undoubtedly considered one. LVMH's warning therefore seems serious, even if its direct impact on Apple's results this quarter is uncertain. Seasonally, however, the third quarter (fourth quarter according to the company's fiscal metrics) has often proven to be the weakest, and following the launch of the iPhone, Apple's stock price at the close of the quarter turned out to be 75% lower of cases. According to Counterpoint Research, global smartphone shipments in the second quarter totaled 294.5 million, up from 268 million in the first quarter. Apple has withstood the competition better. iPhone shipments totaled 45.3 million versus the previous 46.5 million (but still a lower figure).
THE APPLE PENDULUM
The positive factors that fueled Apple's sales and business growth appear to be gradually fading away. However, we must remember that the market situation is influenced by a myriad of factors, including random ones, and it is very difficult to accurately estimate the future. We may not know where the future will be, but we should try to determine where we are. At the moment, Apple does not appear overvalued and the company is far from a “crazy valuation” like that of Nvidia or other technology companies. However, it is difficult to argue that today's valuation represents a "margin of safety" in the event of a recession, which could bring potentially dramatic changes in the number of devices sold. Of course, Apple's growth cannot be written off, bulls are eagerly awaiting the release of VR Vision Pro, which could "reinvigorate" the virtual reality market. Furthermore, further development of artificial intelligence, if translated into new “Siri” features, could interest the market.
The main changes introduced in the new iPhone model concern USB-C connectivity, the camera (although the night mode photo in the presentation sparked controversy – the quality was questionable), the A17 processor and the features of the more powerful Pro versions. Will the “snap your fingers” feature to check your pulse with the next-generation Apple Watch increase sales? Will the gaming capabilities of the new iPhones improve sales enough? Chances are, regardless of the economic climate, Apple's own company will defend itself. Even if its growth slows or regresses. The question is: what will happen to the stock market valuation, which is mainly influenced by factors such as psychology: greed and fear? Here the doubts increase.
The markets clearly welcomed the Apple event without fireworks: this time there is no talk of a technological breakthrough. After the presentation of the iPhone 15, Apple shares on the Nasdaq Exchange fell by almost 1.5%.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/sara-davvero-un-successo-liphone-15-per-apple/ on Wed, 13 Sep 2023 14:04:52 +0000.