Apple releases its latest set of quarterly results next Tuesday and Wall Street is fretting about the figures. People are hanging onto their smartphones for longer, prompting concerns about growth.
Second-quarter results from US technology major Apple, which will be released on Tuesday 1 May, are arguably one of the most important set of results the iPhone maker has released for some time. Wall Street expects a lacklustre quarter of growth in smart phone sales - and these worries have resulted in Apple shares slipping by around 8% over the last week, wiping more than $60bn off its valuation.
This is a major issue for the company as it relies heavily on one product – the iPhone makes up around 62% of group sales. We have known for some time that customers have been holding onto their phones for longer – Dixons Carphone cited this in a profit warning issued in August 2017. The retailer said that new phone innovation was now “incremental” and customers had decided that there were so few new features and improvements they could hang onto their old device for longer. There was also the issue that, in Britain, Apple was charging £1,000 for its new iPhone X, whereas it was available in the US for $1,000 (£718).
We have also seen signs of the slowdown in the chip sector – significant supplier to the smartphone industry. On Friday last week, Taiwan Semiconductor Manufacturing Co (TSMC), a “fab” that manufactures microchips designed by others on contract, saw its shares slide after management said that current-quarter sales of about $1bn less than analysts had pencilled into their forecasts. It also reduced its forecast for semiconductor market growth, to 5% from a previous 5% to 7%. This sparked a sell off in chipmakers and smartphone makers worldwide. TSMC fabricates the main semiconductor components of the iPhone and many others and it receives more than 20% of its revenue from Apple, according to data compiled by Bloomberg.
On Monday, Chipmaker AMS reported first-quarter sales toward the lower end of its guidance range and warned of a downturn owing to weaker orders from one of its main customers. Although the Austrian chipmaker did not name the company, it is a big supplier to Apple.
So what should we be looking for?
Wall Street currently expects Apple to have shifted 53 million smartphone in the quarter. We should also look into how sales have improved in other parts of the tech giants business. The company is looking to double its revenues in services (iCloud, Apple Music, App Store and others) between 2016 and 2020. Progress on this target will be keenly eyed. There should also be a good jump in revenues for the group, as the new devices were keenly priced in the US and especially abroad. It’s outlook statement is also likely to be key.
There is also rising competition to deal with. In its earnings report issued last night, Google owner Alphabet basically said it was ramping up investment to take on rivals. Last year, Alphabet tripled its investment to $7.7bn. Alphabet’s chief executive, Sundar Pichai, said that Google’s nascent hardware unit, which builds smartphones and speakers to compete with Amazon and Apple, was up to three years away from "the scale that we want to see.” This implies that competition is going to hot-up into a market where growth appears to be easing. However, although there are concerns that we have hit “peak smartphone” there is one thing that could prove to be a positive distraction: cash, cash and more cash.
Apple is likely to set out its plans for what it will do with its repatriated overseas money, which it is bringing home following Donald Trump’s changes to the tax. The group has around £200bn in cash stashed around the world. This has led to speculation of further share buybacks, special dividend payments and a significant increase in its regular dividend. This may take some of the sting out of soft iPhone sales for investors. However, longer term, shareholders will also want to see growth in other areas, making iPhone sales as a portion of total sales, shrink.
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