Apple Inc. (NASDAQ:AAPL) has had a rough year or so, with shares down 17% in the last 12 months vs. just a 2% decline for the broader market. And the biggest reason for those declines in AAPL stock is the diminishing returns from the iPhone 6 and a lack of new growth potential.
Now, Apple is trying to spark a new surge in demand with its “mini iPhone,” rumored to be called the iPhone 5se. A launch party is set for March 21, according to invitations sent to the media, and Wall Street will be watching closely to see the details.
The thinking over at AAPL is that a cheaper phone could help Apple Inc. compete down market in the U.S., but also in international markets where its high-end models are cost prohibitive. The March launch is also a pretty transparent attempt to boost revenue with an off-cycle launch, since most new Apple products drop in the fall.
But this is a pretty misguided attempt at spackling over the holes left in the wake of waning iPhone 6 momentum. Apple investors should not be fooled, and this mini iPhone 5SE launch is certainly not a reason to buy AAPL stock now.
AAPL Stock Is Facing Some Ugly Numbers
There are a few big flaws with the iPhone 5se plan — most notably, the previous failed efforts from Apple to go downmarket with the iPhone 5c.
But the biggest bearish points against AAPL have nothing to do with whether the device is a quality product that lives up to the legacy of Apple gadgets. Rather, investors need to look at the simple math working against AAPL stock right now.
Here’s how the numbers stack up:
iPhone 6 Demand Is Weak: According to reports a few months ago, Apple slashed its planned iPhone 6s production by 30% for the first three months of 2016. So even if the iPhone 5se launch is a big success, it is filling a hole and not truly creating growth. In fact, Apple is predicting its first annual sales decline since 2003; in part because sales of the iPhone 6 have lost momentum and the iPhone 6s last fall couldn’t replace that demand.
Gross Margins: Apple gross margins bottomed at around 37% in 2013, but have been slowly edging higher lately. That’s one of the bright spots about the company right now, despite the fact that investors are dealing with what will likely be the first ever year of declines in iPhone sales since the device launched. The iPhone 5se will likely not juice sales enough to counteract that prediction, and only depress the margins AAPL has worked so hard to improve upon.
The iPhone Challenge Is Huge: As I pointed out in a previous article:
“In fiscal 2015, which ended in October, Apple recorded $234 billion in total net sales. Of that figure, the iPhone tallied $155 billion, or 66%. The next biggest category, the Mac computer segment, accounted for less than 10% of sales.”
The fact that Apple is chasing iPhone sales is not surprising given this math, but the challenge of replacing numbers that large simply with a retread of a smaller, cheaper phone seems a bit naive.
It’s undeniable that a smaller, cheaper iPhone may help Apple in the long term as it connects with more emerging market consumers at the lower end of the income spectrum. A lot of these consumers are familiar with the cheaper phones powered by the Android OS from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) right now. Thus, introducing them to the brand and getting them plugged into the ecosystem of media, app sales and perhaps even mobile payments could help AAPL stock down the road from follow-on sales.
But in the near term, this product launch is a non-event. Apple has made its money based on high margin premium products, and the last time it went down market with the iPhone 5c, there was little enthusiasm from either consumers or investors.
Expect more of the same this time for AAPL stock as it tries unsuccessfully to counteract lingering headwinds from the old iPhone 6 slowdown with another downmarket device.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
