Apple, revenues below expectations by 9 billion: declining iPhone sales and slowing Chinese economy among the main causes
After years of growing revenues and earnings above expectations, Apple is also discounting its being too big. Tim Cook, the company’s CEO, announced in a letter sent to shareholders in early 2019 that fourth-quarter 2018 revenues could be below expectations by about 9 billion. Apple estimates for the last three months of 2018 revenues of $84 billion, well below the $91 billion expected by analysts and the $93 billion budgeted by the Cupertino company itself.
A hard blow to the market, with Apple immediately paying the consequences by losing almost 10% of its value on the stock exchange. What is the reason for this unexpected drop in Apple’s revenues? Tim Cook in his letter explains the reasons for the lack of profits: the blame is to be attributed to the iPhone. The device that over the years has become a model for many companies to follow, seems to have lost some of its charm. Prices climbed too quickly, models very similar to each other, have slowed down the sales of the new iPhones and sunk the revenues of the fourth quarter of 2018. The iPhone Xs and the iPhone Xs Max recorded lower sales than expected: users did not want to spend more than a thousand euros for devices aesthetically very similar to the previous model. And with the iPhone Xr it didn’t go so much better.
But Tim Cook in his analysis also finds another culprit: the battery of the iPhones. Apple in the last months of 2018 launched an initiative to change the battery of their iPhones at discounted prices: many users preferred to take advantage of this promotion, rather than spend 700-1000 euros for a new iPhone.
The causes of Apple’s stock market crash
In the letter to investors, Tim Cook tried to explain the reasons for Apple’s lack of revenues in the third quarter (it was fifteen years that the Cupertino company was not forced to revise its profit estimates so downward). The causes are mainly three: the slowdown in the growth of emerging economies such as China, the below-expected sales of the new iPhones and the iPhone battery change offered to users at discounted prices. Let’s break them down in order.
China is an increasingly important market for Apple. And if the world’s most important economy after the U.S. slows down, Apple is also suffering the consequences. Tim Cook, in his analysis, talks about the difficulties of emerging economies, referring to China and its growth that is no longer able to touch double digits. In addition, trade tensions between China and the United States, with duties imposed by both Trump and the Chinese government, have only worsened the situation.
The fault, however, is also the below-expected sales of the new iPhone. Apple’s CEO was forced to admit that in the last months of 2018, the new iPhone Xs, iPhone Xs Max and iPhone Xr did not perform as expected. There are several reasons for this: on the one hand, the price is too high and on the other hand, the few aesthetic changes compared to the iPhone X. Few people wanted to spend over 1000 euros for a new smartphone, when it was possible to find the previous model for less. This braking of iPhones, shows how much Apple has become dependent on its iconic object and that a slump in smartphone sales could have negative repercussions on the company.
Finally, the last cause is to be found in the iPhone batteries. Apple launched a campaign in the last months of 2018 that allowed users to change the battery of their iPhone at a discounted price. The initiative was very successful, but also had some negative repercussions: those who had the iPhone battery KO, preferred to replace it by spending just under 30 euros, rather than buying a new smartphone. This campaign could have cost Apple several billion dollars in profit.
What to expect from the future
Tim Cook wanted to reassure investors: Apple has already set to work to improve the economic results starting from the first quarter of 2019, focusing on innovation and research, as always done in recent years. Apple’s slowdown, however, could also be a sign of a new economic bubble that could hit Silicon Valley companies. The publication of the accounts of the last quarter that will take place in the coming weeks will surely tell us something more.