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Apple: Buy The Rumor, Sell The News?

|About: Apple Inc. (AAPL)

Summary

Apple's flagship product - The iPhone - is facing continued headwinds in most global regions.

Sales growth is slowing and declining in recent years - A trend we expect to continue.

The company's other products and services, we believe, are not enough to overpower the slowdown in its iPhone sales.

We believe that with current valuations throughout 2018, Apple's share price is overvalued at $160 and believe a better ROI can be made elsewhere.

(Note: Written a week prior to Apple's 2017 product event, stalled in review)

iPhone sales are solid, but will not increase dramatically

As per FactSet expectations, Apple (NASDAQ:AAPL) is set to deliver 210.8M iPhones for 2017, down 0.5% from last years 211.9M and 8.8% lower than 2015's 231.2M.

A look at quarterly iPhone sales for the past 3 years tells its own story:


2015 2016 2017
Q1 74.5 Million 74.8 Million 78.3 Million
Q2 61.2 Million 51.2 Million 50.7 Million
Q3 47.5 Million 40.4 Million 41.0 Million
Q4 48.0 Million 45.5 Million 40.7 Million
Total: 231.2 Million 211.9 Million 210.7 Million

Jumping straight to competition, notably by Samsung (SSSMF) in the premium smartphone market, we see declining market share in 2 of the world's largest smartphone markets - China - Down to 13.7% and The US - Down to 34%.

The reason for the quarterly breakdown is the significance of diving in to one of Samsung's biggest mishaps - The Note 7 failure. The recall initially began in September of 2016 and lasted until the Galaxy S8 was released on April of 2017. It's no secret that the lack of a better option boosted iPhone sales for Q1 2017 and Q2 2017, slowing the decline in sales on a global scale.

Assessing a continued downtrend from the lackluster performance of the iPhone 7 and 7 Plus, which disappointed, brings us to conclude that Samsung Note 7 Defectors Aided iPhone Sales for those quarters which would have been significantly lower if there was a viable replacement for the bi-annual (or annual) smartphone upgrade cycle. 

With expected continuation of market share loss in China and a yet-to-be-seen penetration into India's smartphone market, we believe those woes will weigh heavily on the company's sales performance.

iPhone sales constitute over 62% of the company's revenues for 2017. A 5% decline in iPhone sales constitute a nearly complete wipe out of 2018 revenue growth expectations, where analysts are expecting Apple's Sales to Increase Roughly 15% to $254.32B. 

Will Services and other efforts come to the rescue?

The company's Services segment is Rising over 22% in Q3 alone with efforts to boost its offering in the Apple Store and other services. The segment comprised 11.29% of the company's 2016 revenues and is expected to be 12.77% in 2017, growing nearly $5B for the year. 

Its recent foray into Streaming is a worthwhile expansion with companies like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) dominating the Expected $7.5B Market. Assuming Apple will be able to capture quite a significant chunk of market share with its massive user base; this can amount to over $1B of annual revenues, on a conservative note. 

It is safe to assume that Others segment including Mac, iPad, iWatch and others will remain constant but stagnant growth rate in the upcoming years. 

To Conclude the Upside vs. Downside of the aforementioned factors, with Services continuing their 20% upside ($5B annually), Streaming captures a 50% market share (an unlikely $2B annually) and Others continue to perform stagnantly, it will amount to only 4% of iPhone sales revenues, not keeping up with current sales decrease. 

Consequences: ASP and Cash 

Penetrating markets like India and improving China's market share requires lower phone prices, like the iPhone SE, which in turn hurts revenues with an overall lower Average Sales Price (NYSE:ASP). Chinese and Indian smartphone markets are increasingly Dominated by Lower Cost Advanced Companies.

Apple's cash flow and pile, however large on paper, will remain under pressure as sales from its iPhone brand shrink and its foray into new technologies such as AI (Artificial Intelligence), AR/VR, Autonomous Vehicles and others increase Research & Development (R&D) expenses. 

Are Apple's efforts overcoming its natural stagnation?

We believe, when looking at iPhone sales and expectations in global markets, that Apple will generate lower revenues in the years to come until a return is made on its technologies investments. iPhone sales should show a larger decline Y/Y with the new Samsung S8 and Note 8 available in the marketplace.

From a broad market perspective, a better Return on Investment (NYSE:ROI) can be made elsewhere at current prices and valuations, where expectations are set higher then we see are feasible for 2018 and 2019. 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.