Apple: Running Out of Steam?

Apple (AAPL) announced record first quarter of fiscal year 2016 total revenue of $75.9 billion, up 2 percent year-over-year from $74.6 billion during the same period last year and within the quarter’s revenue expectation in the range of $75.5 billion to $77.5 billion. Going forward, the company has also provided revenue guidance for second quarter of fiscal 2016 and estimates revenue to be in the range of $50 billion to $53 billion.

Apple declared first quarter of 2016 net income of $18.4 billion, or $3.28 per diluted share, up 2 percent year-over-year from $18 billion, or $3.06 per diluted share in the first quarter of 2015.
Moving ahead, Apple forecasts second quarter of 2016 gross margin in 39 percent to 39.5 percent range.

The key technology provider reported continued growths in both its top and bottom lines primarily driven by significantly growing global demand for the company’s flagship iPhone and all its models which has also crafted a niche in the market.

Weakness to note

There’s a sharp decline in top line growth of Apple for the first quarter of 2016 compared to the sequential quarter and same quarter last year, mainly due to the failure to introduce any remarkably new features in iPhone 6S and iPhone 6S Plus released this year compared to the strategic release of the iPhone 6 and iPhone 6 Plus last year. Still, Apple is believed to have one key benefit moving into the first quarter of fiscal year 2016, which is illustrated by the company’s planned release of the new iPhone 6 and iPhone Plus in China during previous year post a delay of one month. For the current period, Apple introduced its two innovative devices extremely quick in China.

In all, Apple introduced innovative iPhones in 12 provinces during this year as against 10 releases made last year. However, notable currency headwinds are negatively impacting Apple’s key margins with the continuously strengthening dollar has resulted in lower revenue growth for Apple as against the key revenue growth estimates without these headwinds in the range of 8% to 11%.

What next for Apple?

Apple is hugely optimistic about its long-term growth prospects with continuously growing 4G customers in China coupled with expanding Android switch rate as Apple witnessed the greatest 30% Android switch rate to the advanced iPhones during the previous quarter. Moreover, just 31% of the installed base of iPhone has advanced to iPhone 6 or 6S series till date, which signifies that there’s significant expansion opportunity available with Apple to trade its technologically-superior iPhones. In addition, weaker presence of LTE in developing markets again allows significant expansion opportunities for Apple.

According to the latest Mobile VNI estimate of Cisco, just 4.7% of overall mobile connections available in China were recorded as 4G during 2014. Also, 4G expansion in China is majorly coming from China Mobile with its 4G customers having grown notably to approximately 208.8 million during July 2015 from about 20.4 million during the same period last year. Further, according to the recent Mckenzie study, the middle class in China is projected to expand ten folds by 2020 as against during 2010 which is considered to be a key growth enabler for Apple.

Although, there are certain headwinds for the short-term growth prospects of Apple but, the long-term growth opportunities of the company seems extremely well-placed with rapid shift of Android customers towards innovative Apple products including, the flagship iPhone which is forecasted to impressively grow Apple’s global market share, beating its key competitors such as, Alphabet Inc. (Google).

Apple is believed to be the unrivalled leading technology brand in China despite, the ongoing slowdown in the Chinese economy. Apple’s top line growth in Greater China including, Taiwan and Hong Kong achieved solid year-over-year rate of nearly 99% during the previous quarter. Further, the technology major expects to enhance its store count in Greater China to approximately 40 by mid of the coming year, an increase from 25 during October for the current year and depicting that Apple is hugely positive about China and intends to continue to invest in the country.

Apple is second to the market leader Samsung in terms of the worldwide market share capture with the former’s market share growing at an increasing rate year-over-year compared to that of Samsung and well ahead of several other minor competitors including, Huawei, Lenovo and Xiaomi. Apple is successfully managing to capture a majority of the market share by targeting the first-time buyers in China and achieved a significant 50% of total iPhone 6 and iPhone 6 Plus sales from the first-time iPhone buyers in China during the last quarter. Importantly, Apple declared that nearly 68% of key iPad purchasers in China were first-time tablet purchasers with 40% of these had never had any Apple products earlier.

The leading global mobile brand seems extremely positive about its long-term growth prospects in China and thus, has continued to grow the Apple store count in China despite, the ongoing weakness in the Chinese economy. This growth strategy of Apple is expected to drive significant long-term company growth and thus, benefiting the key stakeholders.

The recent year-over-year Apple’s top line growth has experienced a sharp decline and observed to be closely following China GDP which signifies that Apple’s ability to enhance iPhone sales in China is a crucial indicator of country’s growth.


Overall, the investors are advised to make equity investments in Apple, Inc. considering the company’s significant long-term growth prospects in China despite weakness in the country’s economic conditions looking at a solid PEG ratio of 1.01 which is equivalent to the industry’s growth average. The profit margin of 22.87% seems impressive. However, Apple needs to optimize its debt-burdened balance sheet with significant total debt of $62.99 billion against weaker total cash position of $38.39 billion only, restricting the company to make future growth investments.
Published on Mar 21, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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