The Apple Conundrum

Apple released its quarterly earnings after the bell Thursday. While it crushed Analyst estimates, the stock was down over 7% Friday. The worst single day drop in its stock price in years. So you might wonder why this happened to a company so loved by Wall St. at one point that they made it the largest company by market capitalization in the history of the world, a title that it still holds. Apple is now worth a Trillion dollars. Yes! A Trillion. So why does a company like that, crushes earnings expectations and still gets hammered? Well simplistically, stock prices don’t reflect the past but the future. The expectations from Apple for the subsequent holiday quarter were light. In my opinion though, that still doesn’t justify a 7% stock drop. Now we get to the punchline. The reason most people are giving for the carnage is that, Apple said, going forward, it will no longer report the number of individual iPhone units it sells every quarter.

Analysts have long pegged the future of Apple as a company on how many iPhones it sells, and Apple has successfully grown that number year over year. So why stop now? Actually, it’s quite simple. There are only so many iPhones Apple can sell. The world started becoming saturated of the kind of iPhones Steve Jobs would approve of, a few years ago. Essentially, the small ones. By then, Samsung had already proved that there is a market for large screen devices. So Apple used that trick and launched the IPhone 6 and 6 plus. That helped them boost sales to a record. They’ve followed that strategy for a few years. But it was becoming clearer that the sales growth in terms of units sold will not last forever.

Here comes a strategy shift. Apple decides to follow a two pronged strategy. Focus on the services ecosystem to generate revenue and also try to increase the Average Sales Price (ASP) per iPhone. This way, the same number of iPhones sold would still generate a lot more revenue. However, analysts have long used iPhone unit sales in their predictive models so the units sold is the strongest influence on investment decisions. Apple on the other hand realized that they would have to bite the bullet of replacing unit sales with ASP as the most important driver because the sales price of the iPhone is something that they could increase far more easily than the number of devices sold. Especially since this aligns so well with Apple’s premium brand perception.

This brings us to today. Apple today announced that the breakdown of unit sales of devices will no longer be given as part of the quarterly earnings. However, no such thing was said about ASP. I am not a Wall St. analyst but I saw this coming considering a strategic ploy that Apple deployed at its product release where it launched the iPhone Xs. I want to make it clear that I’ve held at least some Apple stock since 2012. When Apple launched the IPhone Xs, I purchased more Apple stock to make it my largest holding. When I was at the store purchasing my iPhone Xs, I realized why Apple would hold back the cheaper, iPhone XR. That way, everyone that could afford the Xs would buy it rather than wait for the cheaper phone, raising the ASP. This would in turn make the current quarter that much better with the ASP and revenues, hopefully allowing them the cushion to make the lack of transparency going forward. Wall St. however was not as forgiving. Articles were written about how Apple has something to hide, but they were simply trying to signal a change in how money was going to be made going forward. If the financial future of a company depends on revenues and profits, who cares how many units a company sells? This just means that Apple is going from being the Nordstrom of devices to being Tiffany’s in pursuit of higher revenues and is proving that it can work. Another proof of this strategy is the disappearance of the smaller, cheaper iPhone SE which would contribute to the lowering of the ASP.

I truly believe that there is nothing to worry about. Warren Buffett’s Berkshire lost almost $4B on his 250,000,000 shares of Apple in a single day but I doubt he sold any of his shares and neither did I. If the fundamentals are what matter, Apple is as strong as ever long term and I will not be selling any of my Apple holdings any time soon.

I do want to say here that this is not investment advice. These are just my opinions on the subject based on my understanding of business fundamentals. Do not make investment decisions purely based on this article without doing your own research.

-Sanjog