iPhone Sales To Start Shrinking For First Time Ever

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What's going on?

Apple reported results on Tuesday after the stock market closed and it said what everyone was expecting: iPhone sales grew at the slowest pace since the product was launched in 2007.

What does this mean?

Investors were expecting iPhone sales growth to slow, which is a major reason why the stock is down 24% since July (iPhone sales make up about two-thirds of Apple’s revenues). In fact, iPhone sales came in even lower than analysts were expecting (by a little bit) and Apple CEO Tim Cook said that the current quarter (which finishes at the end of March) will likely see the first ever year-on-year decline in iPhone sales. Despite all this, the stock was virtually flat immediately following the results announcement – probably because this bad news was largely expected.

Why should I care?

The bigger picture: From hardware to services? Two months ago, Goldman Sachs added Apple to its ‘Conviction Buy’ list on the basis that Apple’s ecosystem of services is quickly expanding (think: Apple Pay, Apple Music, Apple TV). Instead of relying on selling devices (like the iPhone and the iPod before that), Apple would make its money by offering ‘services’ – and the income would be a lot stickier (a.k.a. more easily recurring). For the latest quarter, service revenue was up 15% versus the same period in the previous year – but still only accounts for about 10% of Apple’s total revenue.

For the stock: Apple’s revenues are declining. Its future guidance for revenue, also announced on Tuesday, was lower than investors expected –  in fact, it points to year-on-year revenue declining by more than 10% for the current quarter. Optimists point to positives like the fact that a record number of users switched from Android to Apple during the quarter – and that should continue to drive future growth. But, fundamentally, Apple needs to figure out how it is going to replace earnings from iPhone sales.

Originally posted as part of the Finimize daily email.

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