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Apple Inc. Has a Legitimate Problem On Its Hands

Is the company going to worry about unit sales of the iPhone or wide margins in the future?

Apple Stock Is Still One of the Best Long-Term Picks Out There

Source: Flickr

Apple Inc. (NASDAQ:AAPL) posted its fiscal first-quarter results yesterday, spurring headlines most owners of Apple stock aren’t accustomed to seeing. That is, while the company’s top and bottom lines rolled in better than expected thanks to its fast-growing service arm, the number of iPhones it sold last quarter fell short of estimates.

It might sound hyperbolic to present in these words, but in many regards, the mixed message may also mark a turning point (possibly more) for Apple and its shareholders.

Going forward, is Apple going to be about selling large quantities of its flagship device, or will the focus be about selling expensive smartphones to a smaller crowd that’s than monetized in other ways? Such as, the sale of apps and media content?

It’s a question that current and would-be AAPL stock holders might want to start asking sooner than later.

Apple Earnings Recap

For the quarter ending in December, Apple turned $88.3 billion worth of revenue into a per-share profit of $3.89. Both were better than year-ago figures of $78.3 billion and $3.36 per share, respectively. Analysts were only modeling a top line of $86.3 billion and earnings of $3.82 per share.

Sales of the all-important iPhone, however, were a different story. For the three-month stretch, the company only sold 77.3 million of the popular smartphone, versus analyst estimates of 80 million. Last quarter’s tally was also lower than the year-earlier total of 78.3 million.

Apple didn’t offer any details as to how each new iPhone — the iPhone X and the iPhone 8 — sold relative to the older models that are still available. The average selling price of $796, however, implies the company sold a fair number of the new and more expensive versions.

The iPhone X comes in two version, the cheaper of which sells for $1000, while the more expensive one costs $1150. All versions of the iPhone 8 sell for a little loss, although they are still more expensive smartphones than those offered by Samsung Electronics Co Ltd (OTCMKTS:SSNLF) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG)

Still, there’s much to celebrate despite the glaring shortfall. CEO Tim Cook commented on the results:

“We’re thrilled to report the biggest quarter in Apple’s history, with broad-based growth that included the highest revenue ever from a new iPhone lineup. iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November. We’ve also achieved a significant milestone with our active installed base of devices reaching 1.3 billion in January. That’s an increase of 30 percent in just two years, which is a testament to the popularity of our products and the loyalty and satisfaction of our customers.”

Overall sales grew in all geographical markets, with Japan seeing the most growth as revenue grew 26%. The Americas were the soft spot, with sales only up 10%.

Total iPhone revenue grew 13% year-over-year, largely thanks to higher-priced phones. Service revenue, however, led the way with an 18% improvement. Its sales of $8.5 billion accounted for about 10% of its total business. That’s now more than the iPad or Macintosh computers contribute to the top line.

Looking Ahead for AAPL Stock

The company feels good about its foreseeable future, modeling revenue of between $60 billion and $62 billion for the quarter currently underway. That’s much better than the year-ago comparison of $52.9 billion.

On the flipside, it’s shy of the $65.7 billion analysts has been modeling for the second fiscal quarter of this year. It’s a shortcoming investors would be wise to not take lightly.

It would be far too pessimistic to prognosticate gloom and doom based on one disappointing quarter (which wasn’t actually all that disappointing) and a tepid revenue outlook for the following quarter. Even on its worst day, Apple is still a better investment than most other companies.

Still, while fans, followers and die-hard Apple stock owners have dismissed the idea that smartphone saturation is a legitimate concern, it is a legitimate concern.

Just as legitimate is the distinct possibility that the iPhone is losing its luster as a trophy or status symbol. Ironically, it’s losing that luster at the same time aspirational demand for the phone is buckling under its debilitating price; a four-figure price tag is where many consumers draw the line.

Indeed, though the average selling price for iPhones last quarter was strong, to pull it below $800 means a lot of buyers were paying considerably less than $800 for whichever device they bought.

Bottom Line for Apple Stock

As was noted, it’s not the end of Apple. Indeed, it may mark a new beginning for Apple, which can now position itself as the name behind the device that not everyone can afford to own. There’s power in that shtick.

There’s also a great deal to be said about the company’s solid revenue growth from its services arm.

On balance, however, it’s starting to look like the good isn’t overwhelming the bad in terms of Apple’s product marketability. If it’s going to keep selling remarkably expensive iPhones and deal with the fact that it’s selling fewer of them, it’s going to have to start selling a lot more of everything else it sells. The iPhone still accounts for about 70% of its revenue, and it seems unlikely the market is going to pay in excess of $1,250 for the next one it develops.

Then again, paying more than $1,000 for such a device seemed unlikely too.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media,

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