Consumer technology icon Apple Inc. (NASDAQ:AAPL) is up strongly after hours amid a Street-beating quarter. However, the rise in Apple stock is almost sure to overshadow the more important takeaway investors should be bringing home:
Apple’s best days are behind it.
Per the results: AAPL reported a profit of $1.42 per share in its fiscal third quarter, driven by revenue of $42.09 billion. The results were down 15% from last year’s $49.6 billion in revenue, and profit of $1.85 per share of Apple stock, but topped estimates all the same. Analysts were collectively expecting the company to earn $1.38 per share of Apple stock on $42.1 billion worth of sales.
iPhone sales were in line or slightly below estimates for the third quarter, depending on the aggregator of those estimates, and year-over-year revenue has now fallen for two quarters in a row. That downtrend isn’t expected to change direction soon, either. AAPL anticipates fourth-quarter revenue of between $45.5 billion to $47.5 billion, versus analyst projections of $45.5 billion, and year-ago sales of $51.5 billion.
Some pros had been anticipating iPhone sales of 42 million for the quarter, while others were calling for a figure of 40.0 million. Apple shipped 40.4 million units last quarter, down 15% from the Q3-2015 total of 47.5 million iPhones.
The iPhone has been a tricky product for Apple as well as analysts to handicap of late. It still accounts for roughly two-thirds of the company’s revenue, but a combination of market saturation and a slowdown in the upgrade cycle has led to volatile results. While the iPhone 6 and then the iPhone 6s both boasted explosive debuts, neither maintained the consumer interest usually seen with previous iPhones, with their sales possibly being cannibalized by the lower-margin iPhone SE.
Some believe consumers are still holding off on a new purchase, waiting for the debut of an amazing iPhone 7, due out in September. And yet, even with the launch of the iPhone 7 in sight, iPhone fans are also already anticipating the iPhone 8, said to be coming in 2017.
The longer Apple waits to entice iPhone buyers, however, the longer competitors have to develop something just as compelling.
The one expected bright spot — services such as iTunes and Apple Pay — essentially met expectations of $6 billion worth of revenue for Apple, up 19% from he services revenue achieved in the comparable quarter a year earlier… though sequentially stagnant.
Tim Cook is looking to make services a bigger part of the revenue mix as the iPhone reaches its maximum revenue potential; it currently only makes up 12% of the company’s business. There are more than 1 billion Apple devices already in use all over the world, though, many of which don’t bear as much revenue for Apple as they could. That user base makes for a sizable opportunity. Credit Suisse says services should create one-third of the earnings reported for Apple stock by 2020.
Sales in China were down 33% on a year-over-year basis, largely reflecting a wave of systemic headwind in the country once hailed as Apple’s key to future growth. In April, Chinese regulators shut down Apple’s iBooks and iTunes service in that country, and last month the Chinese government ordered a stop on sales of the iPhone 6 until a patent dispute had been resolved.
Those impasses are a microcosm of the difficulty Apple has faced in China. CFO Luca Maestri commented “There are some macro conditions that exist in China, both in mainland China and in Hong Kong. The economy has slowed down and the foreign exchange rate has weakened”
Bottom Line for Apple Stock
The third-quarter result more or less underscore the whispers Wall Street has been passing along for a while now… Apple’s best days are behind it as long as Tim Cook is at the helm.
As Investing.com’s Clement Thibault opined,”We don’t believe Apple will be able to replicate its once-in-a-generation trick of creating an entirely new market out of thin air. At least not under Tim Cook’s (so far uninspiring) watch.” The assessment echoes something BGC analyst Colin Gillis also recently said: “Apple has peaked under the leadership of CEO Tim Cook.”
The fact that Apple stock was up 4% in Tuesday’s after-hours trading, however, says shareholders are content with Cook and his results thus far.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.