Just judging from a cursory look at the headlines, it would be easy to conclude the latest smartphone from Apple Inc. (NASDAQ:AAPL) — the iPhone 7 — is going to be another smash hit for the company. Indeed, the buzz has already propelled the company’s shares more than 11% higher in just four trading days, marking one of the best four-day stretches ever for Apple stock. There has to be a reason, right?
The thing is (and as this reporter has cautioned more than once), Apple is one of those bigger-than-life organizations that’s easy to only see in a positive light. From an unbiased viewpoint, the iPhone 7 may not be the heroic performer most Apple stock holders want to assume it has been.
See, we’ve heard this song and dance before.
Mixed Messages From AAPL
Just to take it off the table before any fanboys prepare a posse to tar and feather me, no I don’t have a short position in AAPL, no I don’t have a grudge, and no I don’t want to push the price of Apple stock lower so I can buy some cheaper than what I’d have to pay now … the usual responses from those who don’t like those pesky facts getting in the way of their opinion. My goal is to point out the truth. No more, no less. Fair enough? Good.
The headlines are admittedly compelling. T-Mobile US Inc (NASDAQ:TMUS) said its iPhone 7 pre-orders are the strongest pre-orders they’ve ever seen. Sprint Corp (NYSE:S) said the same thing. Granted, Sprint and T-Mobile are superficially making the iPhone 7 free for subscribers, though those subscribers are under no illusion that they’re the ones ultimately paying for the device.
Throw in the fact that the iPhone 7 Plus is already sold out, and it looks as if demand is insatiable.
And yet, there’s a conspicuous piece of information missing from the mix. It will also be missing after this weekend’s launch of in-store sales. That is, Apple will not be giving any first-weekend unit sales figures … for the first time in anyone’s memory. It’s also not offering any specifics on its pre-order sales.
The company explained that the data is “no longer a representative metric for our investors and customers.” What it didn’t explain was why things changed.
The suspicious decision underscores the results of a survey performed a little over a week ago suggesting demand for the iPhone 7 was even weaker than it was for the iPhone 6S, which came out around this time last year … and didn’t muster any growth relative to the iPhone 6 launch a year before that.
Said in more straightforward terms, it looks like the iPhone is now selling less impressively than the previous version of the iPhone.
Reality Check
As they say, numbers don’t lie.
The chart below marks quarterly sales of the iPhone, in units. The first quarter’s sales following the launch of the 6S were no better than the launch of the 6 in 2014, and worse, they fall much faster the next two quarters than iPhone 6 sales did. It’s the first time we’d ever seen such a drop off.
But that was then and this is now? That’s just it. This was also then. The same hyperbolic buzz a small but noisy crowd has created for the iPhone 7 was also created for the iPhone 6S, and the iPhone 6S fell well short of the hype.
Case in point: Above Avalon’s call that between 120 million and 200 million users would upgrade to the 6S, as discussed by Forbes’ contributor Theo Priestley’s over-the-top headlined article “iPhone 6S Will Crush All Previous Sales Numbers.” It didn’t even come close to crushing the adoption rate of the iPhone 6, as Apple quietly conceded a couple quarters later.
Other overly optimistic headlines about the iPhone 6S include “iPhone 6s could be Apple’s biggest ‘incremental’ upgrade of all time,” “The freak out over declining iPhone sales is overblown” and the premature/misleading “iPhone 6s, 6s Plus sales exceed expectations,” posted shortly after the 6S launched last September.
In other words, many of the things being said about the iPhone 7 now were being said about the 6S then, and the 6S was a relative letdown.
The knee-jerk argument is that consumers skipped the 6S knowing the iPhone 7 was on the way. By that same token though, consumers may also be skipping the iPhone 7, holding out for the iPhone 8 (or whatever it’s going to be called) next year. At some point, Apple has to sell phones here and now.
Bottom Line for Apple Stock
Again, past experience has taught me that I need to explicitly say this, just to stave off any “colorful feedback” based on things I never actually said — Apple is not a bad company, nor is AAPL stock a bad investment. It’ll be fine, especially as it moves toward a business model that leans more on recurring revenue and subscription-based products, and becomes less reliant on hardware sales (even as it makes the best smartphone on the market).
The iPhone is losing its luster as a revenue/profit center, though. Competition is getting better, and saturation is a real issue. Apple didn’t do anything wrong. It’s just an unavoidable situation.
Regardless, to the extent strong iPhone 7 results are needed to push the value of AAPL higher, the next few months could be frustrating.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
