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Apple Value to Drop Below $1 Trillion Again on iPhone Sales Disappointment

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Record quarterly earnings results published yesterday don’t look like they will prove to be sufficient to maintain the company’s valuation above the $1 trillion level when markets open on Wall Street today. The average iPhone sales price of $793 was far ahead of analyst estimates for $751. The strong margins generated by the newest iPhone models, starting at around $1000 and rising to as much as $1449 with extras such as additional memory led to fourth quarter revenue rising to $62.9 billion and profit to $14.1 billion. Over the same quarter last year those figures stood at $52.6 billion and $10.7 billion respectively.

Both figures were ahead of expectations. However, against analyst forecasts for iPhone unit sales totalling 48.4 million, the quarters actual result fell short. Only 46.9 million handsets were sold. Despite bottom line figures surpassing expectations, that was enough to spark an afterhours trading drop in Apple’s share price of over 7%.

That indicates that those investing online in the stock of the most valuable of the FAANGs can expect to see its overall market capitalisation drop back below $1 trillion, the milestone the company became the first in history to pass following the announcement of its third quarter results 3 months ago. Then markets had been willing to overlook slowing unit sales growth and focus on the impressive revenue and profit figures.

But three months on and the market is in a different mood – jittery and nervously looking towards whether future growth rates still justify the aggressive multiples granted to Apple and the other big FAANG tech stocks. Ahead of earnings season tech stocks suffered a correction. Apple’s share price had reached a high of $232.07 on October 3rd. That had dropped to $212.24 by this Monday and $206.52 in afterhours trading yesterday.

In fact, it hasn’t been a poor earnings season at all for big tech. Of the FAANGs, only Amazon missed revenue forecasts with Facebook, Apple, Netflix and Alphabet all coming in ahead of market expectations as did Twitter and Tesla, two tech stocks that have disappointed over recent quarters. Despite that October reached its conclusion with the unwanted record of having been the worst month for the tech sector since 2008.

In recognition of the market’s fixation on iPhone sales numbers rather than overall revenue and profit figures, Apple chief financial officer Luca Maestri yesterday made the surprise announcement that future earnings reports will no longer offer details on individual unit sales. That counts not only for iPhone models but also across the company’s other gadgets such as iPads and laptops.

The company clearly wants to now be judged on revenue and profit figures in the new environment of the inevitable slowdown in unit sales growth following over a decade of rampant success towards the end of which new emerging markets have been picking up the slack from slowing growth in developed markets. The last quarter’s unit sales shortfall was attributed to the economic travails of emerging markets, whose currencies have reached multi-decade lows against the dollar. That makes imported products like the iPhone comparatively more expensive for emerging markets consumers.

Services businesses Apple Pay and Apple Music are currently the company’s strongest growth stories with revenue rising to $10 billion over the quarter from $8.5 billion a year ago. Next year Apple will launch a content streaming service and has already signed up star names such as Steven Spielberg and Oprah Winfrey to make shows, though the exact business model is not yet clear. It will be hoped ever increasing unit prices for iPhones will maintain revenue and profit growth into 2019 with a positive impact on share price without the troublesome focus on unit sales.

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Paul

The author Paul