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Is Apple crumbling?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

It’s all got a bit grey and drizzly over the past few weeks - hard to imagine we had record-setting temperatures in the UK just a few months ago. But, as depressing as it is to write that it does mean we’re only about a week away from opening the advent calendar so stay positive.

Perhaps slightly more depressing for Apple is the company’s equally bleak outlook after their own record-setting summer. It was only July that we were taking straw polls on which of the FAANGs would be the first to reach a $1trillion valuation, with a sneaking suspicion that Apple would pip Amazon to the post. The iPhone maker won the race in early August but a quick look at the firm’s share price this week and the story couldn’t be more different.

The California-based tech giant has entered bear territory after a drop of more than 20% since its recent highs, taking a bunch of its FAANG friends with it.

It’s tempting to lump these firms together and treat them as one homogenous tech mass (the market certainly tends to) but, while there are concerns about revenue consistency across the board, each has their own differentiated business model with unique challenges - or else they wouldn’t be world leaders. So let’s look at two significant factors affecting Apple in particular, away from geopolitical factors like US-China trade tensions which have the whole sector in a tizzy.

Have we reached peak iPhone?

For Apple, the problems start and finish with the iPhone. Seasonal revenues have formed a steady pattern over the past few years but this has come as a result of raising the price of new models to around £1,000. If this is the tactic to make up for falling sales it’s difficult to see where they can go from here to keep the growth going.

Of course, the company is known for its die-hard fans but it seems that there is a ceiling to what consumers deem reasonable value - sales of the iPhone XR have been disappointing, leading the firm to reduce overall production of the model. Throw in a raft of genuine, and cheaper, competition from the likes of Huawei, Xiaomi, Google’s Pixel and the usual suspects, and it might be a case of dropping the price or innovating competitors away just to stand still.

Apple services

Like Amazon Web Services, Apple has stated its intent to build out its own service businesses, including ApplePay, Apple Music and the App store. Although it seems the market remains unconvinced about the $50bn revenue target the firm wants to achieve from the offering by 2020.

Whereas Amazon has been servicing sizeable corporate accounts away from their headline business for quite some time, Apple has a lot of small consumer-led transactions in mind which will give the company a very different look.

Plans to break into TV and movie production seem like a logical step, following the disruptive success of Netflix and an enormous cash pile that investors will want put to use. However, stepping too far from the core business could put analysts off the stock until they see new successful revenue streams emerge.None of this is to say it’s all downhill from here for the company, and the stock currently trading at around 15 times earnings will signal tremendous value for some. However for investors, the emphasis should be on deciding whether Apple’s future is as innovative and market-leading as its past.

Its cash reserves will ease investors’ fears somewhat but, as Buffett reminds us time and time again, actually deploying that cash to generate a higher rate of return from here on in takes absolute precedence over anything the company has achieved to date.

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