Back in November, I said Apple (AAPL) was an undesirable play. I stand by that viewpoint even after the recent stock pullback over lowered revenue guidance. What's my reasoning? There's no real catalyst for the stock. Sure, it's one of the biggest and most successful companies in the world. Sure it has billions of dollars on hand. And as Warren Buffett points out, their principal product, the iPhone, offers a great deal of utility to its consumers. The problem is, there a rising number of other options these days that offer the same utility. It's getting demonstrated in those China sales problems that are coming to light. Furthermore, I'm not very trusting in terms of the longevity of any big tech firm. Trends and consumer interest shift very quickly. Apple has not provided a clear pathway for a growth story that will rival the iPhone in terms of success. Until it does, I don't see the point of taking on exposure to a company that may or may not have a sales problem for the product that makes up the bulk of its revenues.
Tough to tell whether the iPhone is peaking
Thanks to market conditions and chatter regarding the trade war, it's tough to tell whether the iPhone is peaking in China or not. Moreover, it might be wise to see whether this effect spreads to other markets as well. I am not wholeheartedly convinced that this slowdown will be contained in China. There are Chinese domestic companies making products of comparable value without the high price tags. To that end, the situation could deteriorate further.
One of the biggest problems I see here is the price of upgrades, versus the actual benefit of doing so. This is the gambit with all smartphones. Apple has succeeded in enticing consumers to keep buying into the "new iPhone" for quite some time. The irony here is that the phones themselves really aren't that different. I've worked with various versions. Aside from different size screens and cameras, I really don't detect enough difference to justify the average consumer spending hundreds if not thousands for an upgrade every few years.
Is this a blip in sales or a developing trend? It's tough to say at this moment. There's definitely a brawl building in China. It will take time to tell whether the main culprit is in fact slowing economic conditions thanks to U.S. policies, internal Chinese policies, or just plain old competition from rivals. Right now we can't say for sure. I don't like unsure situations.
Apple TV streaming won't be a walk in the park
Streaming may very well be the future; but it's looking like an incredibly crowded future where content spending will require producers to work on very thin margins. If Netflix (NFLX) is an example of anything, it is clear evidence that the content required to entice user growth on a subscription service is incredibly expensive. The competition for quality content will only increase as more players get into the game. Amazon (AMZN) is in the fray. Disney (DIS) has exposure through Hulu and its upcoming platform; and now Roku (ROKU) is making big strides as well. It's a crowded field. It's not going to be some fresh market that Apple gets a head start in; as they did with the original iPhone. If anything, they're behind in the streaming/TV game. There's a reason they just gave in and are putting their streaming app on Samsung TV's.
Something else to consider over the next two years is that we have a president that does not empathize with overseas manufacturing. Donald Trump has made it quite clear that he won't favor companies like Apple that produce products in China. With fresh trade talks underway, there's a chance that some pressure will lift between the two countries, but I'm not counting on it. I think the current administration will continue to pressure companies that sell to the American consumer, but don't put much emphasis on employing the typical American worker.
The most likely repercussion for weaker sales would be lower prices
In many ways, the company has sabotaged itself. There are too many iPhones. What I mean by that is there are too many models to choose from. They've created an almost confusing array of variously priced iPhone models, rather than keeping things simple. McDonald's (MCD) ran into this issue in a different way. Their menus used to have too many items, pulling inventory and supply chains in many directions. With too many similar choices, the company was cannibalizing product sales with other products.
In a way, I think Apple's plethora of different phones has the same effect. Moreover, consumers won't be enticed to purchase the super expensive iPhone XS if they can get what is essentially the same usage out of an iPhone 8. The marginal utility isn't that different. You can't entice consumers to upgrade the phone they already have (at the rate that Apple seems to need in order to keep things rolling) if you're charging $1,000 for your flagship good. It speaks to the rather flawed practice of coming out with a "new" iPhone seemingly every other year. It removes the excitement and appeal.
My guess is that any meaningful stagnation in sales will require price cuts to renew consumer interest. That's going to damage the revenue potential of their goods. A loss of pricing power usually signifies the end of a product's dominance. Is the phone an inferior good to rivals? Of course not -- but they've damaged the prestige of the phone by making a new one (let's face it, they're not that different) far too often.
Until we know for sure that services revenue can actually become a meaningful portion of the business, I don't like the one sided nature of Apple. Services represented $9.98 billion in the fourth quarter vs. iPhone revenues of over $37 billion. Right now, Apple is still a phone company at heart (with a few laptops on the side). I don't like the idea of buying this dip when it isn't totally clear where sales are heading. I'm in no way asserting that Apple is going to tank. I just don't see a lot of momentum to push the stock higher either.