Apple (NASDAQ:AAPL) is facing new challenges in Europe, according to a recent Canalys report which shows a 17% decline in unit shipments in this region. At the same time, Samsung saw 20% growth while Huawei had a 16% decline in unit shipments.
Apple’s market share in Europe in the last quarter declined from 17% to 14.1%. Future momentum of Apple stock and the performance of its services and wearables segments is heavily dependent on iPhone unit shipments. There are few incremental improvements in iPhone 11 series, which can lead to further delays in upgrade, customers opting for lower-priced models and rapid decline in unit shipments.
Apple has also received an order from the European Union to pay $14 billion in back taxes to Ireland. Lower taxes in Ireland helped Apple reduce its tax bill by billions of dollars. Apple has appealed to General Court, Europe’s second-highest. Even if the final judgment is in Apple’s favor, we could see a tightening of the tax laws within Europe, which will increase the tax burden on Apple.
Europe contributed close to 22% of the total revenue base for Apple. A rapid decline in market share and unit shipments in this region will have a big impact on the overall metrics for the company and its valuation. Investors should closely watch Apple’s performance in this region and see if the European revenues are following a similar trend to Greater China region.
Falling Unit Shipments for Apple
Apple has stopped giving unit shipment numbers. This increases the importance of third-party estimates.
One of the recent estimates by Canalys shows that Apple’s unit shipment in Europe in the last quarter declined by 17%. Apple was not able to capitalize on the Huawei ban, which saw 16% decline in unit shipments from Huawei. Instead, the biggest gainer in Europe was Samsung. It had a unit shipment growth of 20%, as mentioned, and also saw its market share increase to over 40%.
Europe is a major market for Apple. If the company starts reporting a significant decline in this region, it will have a huge impact on the overall revenue growth for the company and Apple stock.
Fig: Europe contributed 22.9% to Apple’s revenue base in the last nine months. Source: Apple filings
In the last nine months, European revenue declined by 4%. Although this decline is less than that in Greater China which had a 20% decline in the last nine months, a fall in European revenue base shows the challenges faced by Apple in most of the international regions.
Importance of iPhone Shipments to AAPL Stock
Apple’s management has started focusing on services and wearables segment. But both these segments are heavily dependent on the total iPhone installed base. Apple is focusing on payments and other streaming services which require good unit shipments. If iPhone shipments start falling rapidly, it will reduce the growth rate of the total installed base and also limit the potential of Services and wearables segment.
Source: IDC
Another report by IDC shows that the worldwide unit shipments of Apple have fallen by a staggering 18% in the last quarter compared to the year-ago quarter. This is the highest decline among all the major smartphone makers. One of the reasons for this fall in unit shipments is the increase in upgrade cycle. More customers are holding on to their smartphones longer before upgrading.
This trend will only increase in 2019’s iPhone cycle. Customers might wait for the 5G version of iPhones, which are predicted to be launched in 2020 cycle.
European Regulations Can Hurt Apple Stock
European regulators are making stricter rules for American tech companies, with higher fines for any violations. Recently, a 173-page plan has been drawn up by European officials to counter the growth of American tech companies in Europe. It also mentions about starting a $100 billion investment in high-potential European companies to foster their development.
This is important for Apple because it is in direct competition with Spotify (NYSE:SPOT) which is the biggest tech-based company from Europe in recent years. Apple also earns a huge chunk of revenue from its App Store, where it gets significant commissions. European regulators have mentioned about the negative impact of these commissions on smaller European app developers.
France has passed a bill to tax digital companies on the revenue earned within the country. A similar tax is being looked at other European countries. If passed, this will also hurt Apple’s profitability in Europe.
Apple gets more than three-fifths of its total revenue from outside the domestic US market. Hence, Apple stock has faced greater headwinds from trade tensions and tariffs. If there is an escalation of trade issues between U.S and Europe, it will lead to another reason which increases bearish sentiment in Apple stock.
Investor Takeaway
Apple’s unit shipments in Europe are falling rapidly. This will limit the ability of the company to grow its services and wearables segment in this region. Europe’s contribution of 22% to Apple’s revenue base makes it a very important market for the company. New regulations, taxes, and trade tensions can lead to further erosion of market share in this lucrative region.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
