Many media outlets and commentators are blaming the recent, steep slide of Apple (NASDAQ:AAPL) on the trade war. But Apple’s fundamental weakness, as pointed out by Barron’s this weekend and a number of analysts before that, is actually the primary reason for the underperformance of Apple stock.
Apple can be hurt in two ways by an intensification of the trade war. Its products that are made in China can become more expensive for Americans, and Chinese citizens, out of a sense of patriotism and disgust with the U.S. can buy fewer Apple products.
But, in Apple’s heyday, price was more or less no object for the company’s hordes of devotees. By the tens of millions, American AAPL fans were willing to pay out 300%-400% premiums to buy the products from the company they (almost) worshiped.
Price Increases and Apple Stock
Americans who could get pretty good smartphones from the likes of HTC, Motorola, and LG for a few hundred dollars had no problem shelling out $1,000+ for iPhones, and consumers who could get pretty good Chromebook laptops for $400-$500 had no problem paying, easily triple the price for MacBooks.
But now the idea that Apple may have to raise its U.S. prices by a measly 10% sends Apple stock into a tailspin? It’s pretty clear that something has changed besides that 10% tariff threat.
There’s a great deal of evidence that the trade war isn’t what’s hurting Apple’s business in China. Specifically, well after the trade war between the U.S. and China heated up, the sales of multiple U.S. consumer-facing companies in China have continued to climb. For example, Tapestry (NYSE:TPR) (formerly Coach) said that its sales in China had grown in Q1, and Starbucks’ (NASDAQ: SBUX) comparable-store sales in China surged an impressive 6% in its quarter that ended in June.
The Biggest Problems Facing Apple Stock
So if the trade war isn’t the primary cause of the weakness of Apple’s results and Apple stock, what is? As I’ve pointed out multiple times previously (here, for example), tougher competition and Apple’s lack of innovation are putting a damper on iPhone sales, while the company hasn’t been able to come up with another positive catalyst that can move the needle for Apple stock.
In recent days, in the wake of the company’s lackluster Q2 results reported on July 30, more analysts and pundits are coming to the realization that Apple stock is the proverbial emperor without clothes.
In an article published on Aug. 2, PC Magazine noted that the company’s profits “dipped more than 12 percent amid declining iPhone sales.”
The article went on to say that “as the smartphone market stalls and iPhone sales stagnate, Apple needs a breakthrough technological innovation the likes of which we haven’t seen much of during the Tim Cook era. And the company knows it.”
Quoted by the highly influential Barron’s last Saturday, KeyBanc analyst Andy Hargreaves contended that the growth of the company’s Services business will decelerate as the surges of its hardware user base weaken (that’s another phenomenon I’ve warned about previously).
Hargreaves also believes that Apple’s new Services offerings won’t “be better than what’s in the market.” (I’ve issued similar warnings about the company’s upcoming video-streaming offering.)
Analysts Piling On
Meanwhile, two other analysts, Bernstein’s Toni Sacconaghi and Moor Insights & Strategy’s Patrick Moorhead, told Barron’s that iPhone’s outlook is uncertain.
CNBC also got into the act, warning in a headline published on July 31 (fewer than 24 hours after Apple’s Q3 results) that “Apple and Samsung warnings show most people don’t want $1,000 phones.”
The author, Todd Haselton, reported that “people are holding onto phones longer” largely because “there haven’t been compelling reasons for regular consumers to upgrade.” Apple hasn’t come up with any major innovations for the iPhone in recent years.
Nobody, however, seems to have mentioned recently that AAPL is also facing stronger competition on the iPhone front than previously from Chinese companies like Huawei, whose smartphone market share is now reportedly higher than Apple’s.
AAPL stock briefly climbed after the company’s headline Q3 results beat average expectations by a small amount, driven by higher than expected revenue from Macs and the Wearables, Home and Accessories category which include Air Pods and Apple Watch.
But the sales growth of the very expensive Macs and of wearables, which are largely seen as “wants” rather than “must haves,” are likely to fall sharply if the economy deteriorates. More important, iPhone sales ($26 billion in Q3) and Services revenue ($11.45 billion) dwarf Mac and wearable sales, which both came in around $5.5 billion.
The most critical aspect of the results for AAPL stock is that the sales of iPhones, still the company’s largest revenue source by far, dropped 12% YoY. The second most important aspect of the results for Apple is that its Services business, which is supposed to rescue it from the deterioration of iPhone demand, came in below analysts’ average estimate.
The Bottom Line on Apple Stock
The trade war isn’t the primary reason for the weakness of AAPL stock. Rather, many analysts and investors are seeing that Apple has major fundamental problems. Specifically, the company’s iPhone, by far its biggest moneymaker, is weakening tremendously, and Services is not going to compensate for that.
Only if AAPL suddenly comes up with hugely popular innovations or makes a game-changing acquisition will AAPL stock not drop tremendously going forward. But Apple CEO Tim Cook, who by trade is a supply-chain professional, is a manager, not an innovator, and he doesn’t seem to like huge, game-changing acquisitions.
Therefore, until Cook is shown the door or voluntarily moves on, investors should sell AAPL stock.
As of this writing, the author did not own shares of any of the aforementioned securities.