Huawei Destroyed Apple's iPhone Growth in Fiscal Q2 and will Continue to do so as Apple shifts their Focus to Services
Apple's shares rose almost 5 percent on Wednesday, which were actually gained after hours yesterday as we presented a financial chart of AAPL in our report titled "Wall Street Applauds Apple's Financials for Q2 2019 that Provides Strong Guidance." That 5 percent pushed Apple's market valuation back towards $1 trillion. Of course with Apple reinvesting $75 billion into company stock, it was a no brainer to see the stock rise on that news alone.
In a new Reuters report they note that Apple's rise still "..leaves it trailing Microsoft in the race to be the world’s biggest company by market value, substantially because the number of Apple shares has fallen steadily as it returns billions of its profits to investors by buying back its own stock."
The report further noted that "Apple said its buybacks last year amounted to more than $70 billion, or around five times its own spending on research and development.
While Apple’s research budget still remains one of the world’s largest, many of its Wall Street backers point to the risk that the iPhone may be losing its appeal with consumers.
Yet with that said, at least six brokerages hiked their price targets on Apple's stock, with Jefferies making the most aggressive move by raising its target by $50 to $210. You could also check out this CNBC report covering ten brokers position on AAPL after Apple released their financials yesterday. Most are positive.
Reuters noted a long standing Morgan Stanley analyst as stating: "Apple reported a clean March quarter and bullish June quarter outlook which against a backdrop of negative investor sentiment sets up for shares to move higher."
Yet perhaps Canaccord Genuity's analyst said it best: "With a mature smartphone market, we believe Apple has locked up strong share of the premium tier market and will continue to dominate high-end smartphones sales and capture the vast majority of smartphone profits for the next several years."
Apple ended 2018 by remaining the king of premium smartphones where all of the real profits come from. This is Apple's last iPhone stronghold and Huawei and OnePlus are beginning to make a dent against Apple's premium iPhones.
Not Everything is Rosy
Overall, it seems that Wall Street is back to singing Apple's praises, even in light of Apple's iPhone shipments having crashed in calendar Q1 2019, according to IDC's latest smartphone report. IDC's chart present below is certainly an eye opener.
It's hard to understand how that major botch is being swept under the rug so quietly without much fuss. Why didn't a single analyst push Apple's CEO hard on this point during yesterday's conference call?
If IDC's statistic is actually correct (Canalys reports iPhone shipments down 23%) you'd have to say that Wall Street analysts are not being honest with their shareholders to not reveal this incredibly important statistic.
If this was Samsung having dropped 23-30% in Galaxy phone sales they would have been mercilessly slashed in the press, making headlines around the world. So congratulations to Apple's CEO for painting a widely brushed positive picture of Apple's financials while iPhone sales crashed to the extent that they did.
Cook even stated during the financial conference in context with iPhone (at roughly the 4:20 mark) that "the decline was significantly much smaller in the final weeks of the March quarter."
That means Apple's iPhone shipments were actually much worse than the decline they ended up with. I have no idea how he spun that into a positive. Cook has learnt to sell ice cubes to eskimos like Steve Jobs had mastered over time.
On another point arising from Apple's CFO's announcements, the NYTimes posted a report titled "Apple’s Plan to Buy $75 Billion of Its Stock Fuels Spending Debate" In many ways it's a classic Republican v Democrat, Capitalist v Socialist argument that will always be around, and yet it's worth noting how the debate swung this time in respect to Apple.
At one point in the report it was noted that "Apple accounted for seven of the eight largest quarterly stock buybacks in history, including the latest quarter."
On that very same point one Wall Street expert from Chatham Road Partners told CNBC:
"Apple CEO Tim Cook lacks founder’s flame, and he’s going to be known, at least in my book, as the buyback king. He’s a buyback CEO. His No. 1 accomplishment has been returning that $300 billion to shareholders. And fine, that’s quite an accomplishment, but it also means you had no ideas. You had no ideas to better deploy that cash. And I think in 10 years from now, we may look at this cycle and the cash flow that has been generated from the iPhone and the lack of innovation to be able to deploy that cash and be regretful that Apple wasn’t able to come up with new revenue streams." Ouch. While that was certainly an overboard assessment, I don't think he's alone with that view.
At at the end of the day Apple fought like hell to ensure that they didn't repeat fiscal Q1 results. They released quality product updates and used price cuts and trade-ins to stimulate iPhone sales. That's a positive.
Apple now has to pray that their new Apple Arcade and Apple TV+ services deliver the numbers that they're hoping to generate to make Wall Street forget about falling iPhone sales.
On the flip side of things, iPhone sales crashing to the extent that they did in the quarter is a haunting concern in a year where Apple will be the only major smartphone player without a 5G phone.
More disturbing is that the smartphone freight train known as Huawei grew 50% in calendar Q1 in contrast to Apple's disastrous iPhone crash. For Huawei to have achieved what they have without being able to sell a single smartphone in the U.S. because of a U.S. ban, is rather stunning.
I've watched a few Huawei keynotes in the last year and Huawei's CEO focuses on mocking Apple's iPhone features one by one. It's a message that's designed to deminish Apple's one-time "innovator" status in the market. It seems to be registering with consumers.
Huawei has no intentions of slowing down their growth. Their business model of constantly updating a wide variety of smartphones at different price and market points throughout the year in energetically focused events is destroying Apple's static once-a-year dog and pony show that only focuses on selling expensive premium iPhones.
While Apple will be focused on selling Apple TV+ hard in the coming weeks and months, Huawei will be introducing new smartphones (5G and Mate X Folding phone) and their first smartglasses.
I think that Apple's die-hard hardware fans would rather see Apple roll up their sleeves and double down on cool hardware rather than drift off and rely on Hollywood for future success. Then again if Apple would see it in their heart to surprise us with an all-new premium smart TV to enjoy our new Apple TV+ services on, we would probably see Apple's services push in a completely different light.
Could this be Apple's surprise at this year's WWDC event in June? It's a long shot, to be sure, but only time will tell.
In the short term at least, Huawei destroyed Apple's iPhone growth in Fiscal Q2 that can't be denied and they'll continue to do so as Apple shifts their focus to services.
REPORT UPDATE MAY 3, 2019 1 p.m.: also see today's report titled "Apple's SEC Form 10-Q Filing Reveals that iPhone Sales were down in Every Major Market Served."
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