Do low expectations for Apple make its stock a bargain?
I don’t think so. After all, according to a case I co-authored, Apple In China and India, the iPhone maker’s strategy has hinged on its ability to charge higher prices while raising the costs for customers to switch to rival products.
Apple’s efforts to apply these strategies in the world’s most populous countries — China and India — runs into a buzz saw when Apple’s prices are so much higher than what consumers in those countries can afford. Moreover, Apple rivals in both countries offer products that better meet the needs of local customers at much lower prices.
To be sure, Apple has continued to keep prices high and hope the wealthiest members of those societies will pay up for Apple products.
However, cracks in Apple’s strategy have surfaced. Apple is cutting iPhone prices in China, according to the Wall Street Journal. Moreover, the Supreme Court refused to overturn an antitrust decision that could cost Apple billions of dollars in App Store revenue, reported Bloomberg News.
This suggests Apple may be losing its ability to keep charging high prices and imposing high switching costs on customers.
The way to prevent this loss of market power would be for Apple to create a new product with the power to transform how people live and work. Apple — which suffered a 2.8% drop in revenue last year — last accomplished that in 2007 with the launch of the iPhone.
I question whether Apple’s Vision Pro mixed reality headset — at a starting price of $3,499 — will become the next growth-propelling new product for the company.
Microsoft — which posted nearly 13% growth for the September 2023 ending quarter — dethroned Apple as the largest company by market capitalization.
Cutting iPhone Prices In China
Apple is cutting iPhone prices in China — however, the cuts are for a short time period and for minor amounts. Coming ahead of the gift-giving Lunar New Year holiday, Apple is cutting iPhone prices by up to $70 and other products by as much as $110, according to the Journal.
The price cut could be an experiment to see whether the lower prices will boost iPhone sales which have declined substantially in China. In the last quarter of 2023, iPhone sales in China fell 11%, noted market-research firm Counterpoint.
Counterpoint analyst Ethan Qi “linked the downturn to waning demand for smartphones in China and intensified competition from local rivals.” As I wrote earlier this month, Huawei is just such a rival and it is gaining considerable market share.
The Chinese company’s high-end phone segment market share soared from 11% in 2022 to 24% during the third quarter of 2023. While Huawei was previously blocked from buying TSMC’s most advanced chips for smartphones, the smartphone maker can now buy a comparable chip from a Chinese chip maker, SMIC.
As a result, Huawei announced its Mate 60 Pro, a smartphone that’s “roughly comparable to a top-of-the-line iPhone 15 Pro Max,” noted Bloomberg. Given the Chinese government’s pressure for locals to buy from local vendors, Apple could face further pressure from Huawei.
Samsung — which has long dominated the world smartphone market — has done well recently in China due to demand for its flagship Galaxy S23 and its foldable phones — which Apple does not sell, noted the Journal.
To be fair, despite its problems in China, Apple surpassed Samsung as the top global smartphone maker in 2023. “Apple’s ongoing success and resilience is in large part due to the increasing trend of premium devices, which now represent over 20% of the market,” said IDC analyst Nabila Popal, according to the Journal.
Nevertheless, China — which accounts for roughly 20% of Apple’s 2023 sales, according to CNN — remains a sore point. Last week, Jefferies Research in a note to clients said iPhone sales in China fell 30% in the first week of 2024, Reuters reported.
Supreme Court Loss Could Cut Billions In AppStore Revenue
That is not the only force reducing Apple’s revenues.
On January 16, the U.S. Supreme Court rejected Apple’s appeal for a review of an antitrust ruling — potentially costing the App Store billions in revenue. The Supreme Court refused to reconsider an appeals court ruling which enables developers to direct iPhone users to buy games through a store that charges lower commissions than the App Store’s up to 30% rate, reported Bloomberg News.
With the appeals court ruling now in effect, developers will direct consumers to buy from the Web rather than through the App Store — costing Apple billions of dollars in revenue, estimates Bloomberg News.
In Europe, Apple has already lost a similar battle — requiring Apple to permit customers to download apps from outside the App Store, I wrote earlier this month.
“The company fought hard against, and lost. [Apple must now comply with] the EU’s new Digital Marketing Act, which requires vendors to allow customers to download apps from other companies,” Charles King, the principal analyst at Pund-IT, told TechNewsWorld.
He added, “If similar regulations were adopted in the U.S., it could substantially reduce Apple’s App Store commissions over time.” King’s prediction has come true and it remains to be seen exactly how much these rulings will reduce Apple’s revenue.
Apple’s Innovation Deficit
Trees do not grow to the sky. Nor will an innovative product that creates a huge new market continue to enjoy growth and profitability without attracting competitors and ultimately saturating the market.
That is why companies should invent new products with tremendous growth potential so they can offset the decline in maturing product lines with rapid growth in new ones.
Apple clearly lags its largest peers when it comes to growth. According to the Wall Street Journal, Apple’s revenue fell nearly 3% in the fiscal year ending September 2023 and FactSet notes Wall Street expects Apple to generate single-digit growth averaging 5% annually over the next three years.
Apple’s Vision Pro — a mixed reality headset — will not pick up the slack. At a starting price of $3,499, UBS analyst David Vogt expects Apple to sell 400,000 Vision Pros in the first year, reported the Journal, adding about “$1.4 billion in revenue.” That would amount to about half a percentage point of Apple’s total revenue.
Apple’s next quarterly report does not look likely to stop the decline in quarterly revenue that began with the fourth quarter of 2022.
Perhaps that helps explain why Microsoft — with a market capitalization of $2.89 trillion on January 16 — surpassed Apple by $20 billion as the world’s most valuable company.
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Why Apple’s iPhone Strategy Could Worsen Its Revenue And Stock Decline - Forbes
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