Investors and die-hard fans of Apple (NASDAQ:AAPL) can spin and interpret the information however they want, but it won’t change the reality of the matter. That is, the iPhone’s most fruitful days are behind it. The 20% pullback AAPL stock has suffered since early November — when the company announced it would no longer disclose iPhone unit sales — speaks volumes on the matter.
That’s the argument from one side of the table anyway. Is it a valid one?
Not only is it a valid theory, it’s an increasingly popular one. Two more analysts just joined the growing bearish camp, lowering their view on Apple stock roughly in step with the fading pricing power of the once-iconic device.
Clues Piling Up
The red flags have been waving for weeks, even if that waving initially went unnoticed.
The headwind started to blow as far back as June, when Apple told its suppliers to trim production of components by 20% during the latter half of 2018. The warning signs have popped up precipitously just within the past month, however, surrounding the release of Apple’s fiscal fourth-quarter numbers. After reporting no sales growth in terms of units last quarter, Qorvo (NASDAQ:QRVO), Lumentum Holdings (NASDAQ:LITE) and a whole slew of other component suppliers all cautioned that demand was sagging. Foxconn, which assembles iPhones, just announced it was planning to cut $2.9 billion in costs this coming year. No specific reason was cited, but given its close relationship with Apple, it’s not difficult to fill in the blanks.
If the speculative math is on target, the company’s initial plans to manufacture 70 million units of the iPhone XR (the cheapest of the latest round of new products) has since been pared back by about a third.
And Apple has only fanned the flames of worry by deciding to no longer post unit sales of iPhones in its quarterly report, suggesting the information is no longer a relevant detail — though it was certainly relevant enough to include when sales of the device were growing.
What They Said
And that decision may have reshaped analysts’ perceptions of Apple far more than anyone might have imagined.
Admittedly, analysts have jumped to the wrong conclusion about iPhone red flags before. Those misguided assumptions were reset every three months, however, when Apple would post unit sales and iPhone revenue, in turn allowing investors to figure out the average selling price of each iPhone sold during the quarter in question.
That reset won’t be dished out going forward, though, leaving some analysts (with little reason or opportunity to do otherwise) presuming the worst on a much wider scale.
Goldman Sachs analyst Rod Hall is one of those doubters. For the third time in a month, he advocated a lower price target for AAPL stock, explaining: “In addition to weakness in demand for Apple’s products in China and other emerging markets it also looks like the balance of price and features in the iPhone XR may not have been well-received by users outside of the US.” Hall added that he sees “material risk to March quarter guidance if current demand trends continue to play out.”
Since Nov. 2, Goldman Sachs has lowered its target price on Apple stock all the way from $240 to $182.
That lowered target follows a downgrade from Guggenheim Partners analyst Robert Cihra, who suggested iPhone sales (by unit) would fall 5% in the year that just got underway. Cihra added, however, that “Unlike last year [we] do not see ASP (average selling price) increases providing enough offset, with our forecast that blended iPhone ASPs increase only +3% Y/Y [year over year], leaving iPhone revenues -2% Y/Y.”
Bank of America Merrill Lynch downgraded AAPL stock as well shortly after its early November earnings report, summing up the call with “we are incrementally concerned that not all the weakness is capture in N/T [near term] and we are likely to see further negative estimate.”
It’s an awful lot of analysts all saying the same thing, and we’re only seeing headlines about the high-profile downgrades. There are more lesser-known critics serving up the same caution.
Bottom Line on AAPL Stock
None of this is to suggest that Apple is doomed, because it isn’t. The iPhone is still arguably the highest-quality smartphone on the market. And even though it’s premium priced, a wide swath of consumers will pay whatever the company is asking. Apple also has some of the most loyal repeat customers in the world.
There’s still a risk, however, to the value of AAPL shares.
Apple stock is an equity that’s largely been valued based on the company’s ability to sell more and more iPhones at ever-increasing prices. As Goldman’s Hall opined, however, “The laboratory of the market now points to Apple being at the limit of their price premium for the iPhone … In our experience with mobile phones, when pricing power is lost, consumer technology companies tend to either lose margins or market share or both.”
Those aren’t words shareholders want to hear, but given that more than half of Apple’s business comes from its iPhone franchise, they’re words shareholders need to think about.
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.