Since the surprising announcement on changes in its reporting structure, Apple (NASDAQ:AAPL) stock has seen some wild swings. Apple’s management is trying to move away from the dependence on unit sales and trying to increase the importance of its Services segment. That makes sense. However, it is important to note that the correlation of iPhone unit sales to Apple’s stock has been over 0.9. This means that the market will have to price Apple without the most important metric it has used in the past.

The new reporting structure will increase the importance of outside reports that are estimating unit shipments. This will likely lead to an increase in speculation, and that probably means an increase in the volatility of the stock. Even highly respected organizations like Gartner and IDC have reported estimates which were substantially off from the quarterly figures reported by Apple.

Was This Inevitable for AAPL Stock?

During the rapid growth phase of iPhones, Wall Street was fixated on unit shipments. The talk about a possible “supercycle” would keep the bullish momentum for the stock for several quarters. We can easily see the impact of iPhone unit shipments on Apple stock by looking at the following graph.

Fig: Impact of average unit shipments on Apple’s stock price. Chart by author

The only divergence was in the recent quarters when Apple had stagnant iPhone shipments while the stock price increased over $200. Bullish analysts have justified this by noting the positive impact of tax reform, rapid pace of buybacks and the recent bump in average selling price (ASP). However, all these factors will face a difficult YoY comparison in the next two quarters.

Last year, the launch of iPhone X in November 2017 had already increased the ASP in the holiday quarter. Hence, it is unlikely that Apple would be able to show huge ASP growth in this quarter, especially as the lower priced iPhone XR sales increase. Most of the positive tailwinds due to tax reform have already been priced in. This makes it difficult to beat the already low effective tax rate which the company reported.

At the same time, Apple is facing headwinds due to a stronger dollar which has increased the price of its products in international markets. The combination of these factors has led to the weak guidance given by the management. Due to a saturation in the smartphone industry, it would be difficult for Apple to show any meaningful unit sales growth. The recent price hike in iPhones would also lead to tempering of the demand. Hence, it was inevitable that the management would look beyond the unit sales and focus on other segments of the business which can still show better growth momentum.

The Good, The Bad and The Ugly for Apple

In the short term, we could see Wall Street’s fixation on unit shipments of iPhones and other products continue. This would increase the importance of outside sources. But these external estimates have been very wrong in the past.

Fig: Gartner estimates of PC shipments in 3Q18. Source: Gartner

We can see from the above chart that according to Gartner, Apple’s Mac shipments have fallen from 5.385 million in the year-ago quarter to 4.928 million. This represented a fall of 8.5% in unit shipments.

Fig: Mac sales reported by Apple in the recent quarter. Source: Apple filings

In Apple’s earnings report, Mac shipments were much higher than the estimates given by Gartner. While Gartner estimated 8.5% fall in Mac shipments, Apple reported only 2% fall in shipments.

The Mac shipment estimates are even more off the mark for IDC. The recent report by IDC mentioned Mac shipments at only 4.762 million which is equal to a massive fall of 11.6% from last year.

Source: IDC

Both Gartner and IDC are highly respected organizations which have been cited by most of the research analysts. We can see that their estimates are off the mark by a significant level. When Apple stops reporting unit shipments, these reports will become even more important to gauge the future direction of Apple. This will lead to wild swings in the stock price as they overestimate or underestimate the performance of Apple.

In the recent fiscal year, Apple reported $37 billion in Services segment which made up less than 14% of the total revenue base. Even though Apple’s management will start reporting greater detail about this segment, the contribution of this segment to the overall business is still quite low.

A Silver Lining

We will see short-term swings in the stock as different data sources are used to forecast the performance of the company. However, for long-term investors, this could be beneficial as the management focuses more on evolving the business in the next decade instead of focusing on next quarter or year.

Warren Buffett, who holds over 5% of the stock, has not revealed his thoughts on the change in the reporting structure of Apple. But it is likely that he favors this position as long as it helps the management move to a more sustainable and higher-growth business model.

Again, the ball is in the management’s court and they would need to hit some home runs in the Services segment. Greater detail about the cost and margins of different businesses within Services segment is also a good sign which allows seeing the future potential of this segment.

Investor Takeaway

Apple will stop reporting the metric which has shown over 0.9 correlation with the company’s stock. This will force analysts and investors to look at outside reports for an indication about unit shipments. However, these reports can be widely off the mark in underestimating as well as overestimating the sales. This should lead to bigger swings in the stock price and provide an opportunity for short-term trading.

For long-term investors, this change is mostly positive as it would not matter if the company sells 220 million or 240 million or 210 million iPhones in the next year. A longer-term focus by management could help in building a more robust business model.

As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.