Apple: While Macs Go Without A Design Refresh, Sales Suffer

| About: Apple Inc. (AAPL)

Summary

Research indicates that Apple Mac shipments declined y/y in the June quarter.

Many Mac models have been too long without a design refresh.

Apple may have delayed refreshing desktop and notebook Macs due to delays in upgraded GPUs from AMD.

New data from research firms Gartner and IDC indicate that Apple (NASDAQ:AAPL) Macs suffered significant declines in shipment volume in calendar Q2. No one is particularly surprised, given how long it is taking Apple to update many Mac models such as the MacBook Pro and the Mac Pro. While fans look expectantly to a Fall refresh, investors have to wonder why it's taking so long.

Source: Anandtech

No Longer "Outperforming the Market"

The research results of IDC and Gartner only disagree about the magnitude of the global Mac shipment decline. IDC says it fell 8.3% y/y to 4420 units, while Gartner says it fell 4.9% y/y to 4559. Both Gartner and IDC agree that the global PC market is still in decline, by about 4.5-5%.

The PC market in the US appears to have finally stabilized, with slight growth y/y of 1.4% according to Gartner, 4.9% according to IDC. I mention both firms because I think the differences between them give the reader a fairly good sense of the magnitude of the uncertainty in their estimates.

The slight growth in the US didn't help Apple, however. IDC thinks Mac unit shipments declined y/y by about 7.6%, while Gartner pegs the decline at 9.3%. I won't even get into market share. Suffice it to say that market share declined.

Up until now, Apple has been able to spin Mac sales as "outperforming the PC market". Not this quarter. Mac sales declined in the US while the US market grew. Globally, Apple's decline was probably on pace with the market.

Mac Incrementalism

Following WWDC in June, I definitely had the feeling that Mac OS had fallen even further down in Apple's list of priorities. MacOS Sierra was mostly about incremental improvements. The biggest changes were Apple Pay in the Safari browser and the inclusion of Siri.

Meanwhile, the hardware has languished. The non-Retina Display MacBook Airs have become a redundant anachronism with the advent of the 12" Retina Macbook. The MacBook Pros have been in desperate need of an upgrade to Skylake 14 nm processors at the very least. But actually, the MacBook Pros are in need of more extensive redesign with new ports such as Thunderbolt 3, which would hopefully bring with it external graphics card capability.

Rumors persist of a MacBook Pro redesign that features an OLED touchbar strip in place of function keys. The concept has merit, but wouldn't a touch screen be even more useful and flexible? It's as if Apple just can't bring itself to admit that touch screen PCs are a good idea, so it tries to provide the next best thing. This could be death by half measures.

And finally, there's the poor old Mac Pro, which is essentially unchanged since its introduction in December 2013. It's still running Intel (NASDAQ:INTC) Ivy Bridge EP processors which were launched in 2013 and use Intel's obsolete 22 nm process. This is absolutely shameful for a company claiming to be a leader in technology and for a product that was supposed to offer Mac professional users best in class hardware.

Rinse, Repeat

Other PC companies with far less in the way of cash flow and profits have managed to upgrade their offerings with the latest Intel processors, so one has to wonder what's going on. Some point to the delays in updating the Macs as proof of Apple's decline. That explanation doesn't quite fit in my view.

Apple has plenty of resources to throw at what is basically a fairly trivial problem. New Intel processors come out on a regular basis. Apple just needs to design new circuit boards or other hardware to take advantage of them. Rinse, repeat.

Is Apple holding out for some big breakthrough in hardware? The biggest breakthrough, touchscreen PCs, already seems to have passed Apple by. I'm really struggling to explain this, because I just don't see any good explanations. But I'll offer up some hypotheses.

Hypothesis 1: Apple has been waiting for AMD (NYSE:AMD) to come up with new, higher performance, lower power graphics processors, and is still waiting. I consider this the best explanation for what's going on with both the MacBook Pros and the Mac Pro. In this scenario, Apple bought AMD's marketing hype surrounding Polaris and Vega. Polaris sounded just perfect for the discreet GPU option for a new MacBook Pro, and Vega equally perfect for a new Mac Pro.

Except that Polaris didn't live up to the marketing hype, and doesn't even operate at a low enough power level to be put into a notebook. And Vega? Who knows when that will arrive (and, yes, I don't care what the rumors say about an early launch), or how it will perform.

This has left Apple treading water with Mac, and wondering if it should keep waiting for AMD to deliver on its promises. Probably Apple has decided that it can't wait any longer. Apple really wanted to help AMD out, provide competition for Intel, etc. But it can't afford to be shackled to the walking dead.

There are problems with this hypothesis, admittedly. The main problem is whether it would really have taken Apple so long to realize that AMD wasn't going to deliver on the Polaris/Vega promise. Furthermore, some redesigns could have gone forward anyway. Apple could have upgraded the MacBook Pros with new Intel processors, and put off offering a discrete GPU option. Despite the problems, this remains my best guess.

Partly it's my best guess because the alternatives just don't seem to work at all.

Hypothesis 2: Apple is about to embark on an historic break with Intel by putting its own custom ARM processors in its Macs. This could happen. But it's extremely implausible under the current Cook regime of seeming incrementalism. Apple is sneaking up on this through the iPad Pros, using iOS as its next PC platform rather than trying to resuscitate the PC. There are obvious advantages and disadvantages to this.

Hypothesis 3: Apple is just clueless and stupid, and the delay in refreshing the Mac is symptomatic of its systemic decline. Okay, I can see where this is appealing to the Apple bears. I just don't think Apple has descended into the level of stupidity that Hypothesis 3 represents. Doubtless, there will be some who disagree.

Investor Takeaway

I admit I'm becoming a little concerned about CEO Cook's leadership of Apple. There are a number of signs that Apple's management have lost the ability to embrace dramatic change and innovation. That was my fundamental impression from WWDC.

The stagnation of the Mac product line, combined with the weight of rumors to the effect that iPhone 7 will be "little changed", also convey that incrementalism has become the new norm at Apple. However, I'm not convinced that the incrementalism is as bad as it appears. Apple has often spent years working on significant innovations under cover of its well known secrecy. This was the case with the 64 bit ARM processors Apple introduced in the iPhone 5s.

For that reason I'm still taking a wait and see attitude towards the new products to come, both in iPhone and Mac. Despite the delays and rumors of lack of innovation, the new products are on the way. By the Fall, we'll probably have a number of new Macs, as well as the new iPhone. Probably the new products will relieve investor anxiety about Apple's ability to innovate.

If they don't, there's always regime change. There's a tendency to assume that as companies age, they must inevitably become more conservative and hesitant. It's a tendency, not an inevitability. The innovation or lack of it in technology companies is a direct product of the decisions made by company management, rather than the product of inevitable historical forces.

Since Cook has shepherded a number of product innovations including the 64 bit mobile processor, the larger screen iPhone, and the Apple Watch, I'm not prepared to give up on him, yet. I remain long Apple and recommend it as a buy for investors with a 3-5 year investment horizon.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.