Shares of Apple AAPL dipped by as much as 2% premarket on the back of reports that the tech giant is set to produce fewer iPhones in the second half of 2018. Let’s quickly review why this is likely very bad news for Apple investors.
Apple reportedly told suppliers to manufacture roughly 20% fewer components of it upcoming iPhones, according to Nikkei. Last year, Apple asked its manufactures to ready themselves for 100 million shipments of the company’s flagship smartphone, which included iPhone 8, iPhone 8 Plus, and iPhone X devices. This time around, Apple is reportedly taking a more “cautious approach,” and telling suppliers to prepare for 80 million iPhones.
Apple, in its now customary fashion, is reportedly set to launch three new iPhone models in the second half of 2018. But these new warnings of 20% fewer iPhones should make Apple investors rather nervous because it likely signals that there is simply less demand for the product that has driven Apple’s success and growth for over a decade.
How Much the iPhone Matters
Apple’s second-quarter revenues jumped by 16% from the year-ago period to reach $61.14 billion. The tech giant’s earnings also popped by 30%. Meanwhile, Apple’s iPhone unit sales climbed just 3% to hit 52.22 million in Q2.
Luckily, for Apple and investors, the high price of the iPhone X helped lift iPhone unit revenues much higher. The company reported iPhone revenues of $38.03 billion, which marked a 14% surge. With that said, this is also where the problems arise.
Apple’s flagship product accounted over 62% of Apple’s total Q2 revenue. This was an improvement from Q1’s 70%, but it highlights a problem that investors have discussed for years: Apple relies too heavily on the iPhone.
Apple’s iPhone is one of the most successful consumer products in history and continues to be Apple’s single biggest revenue driver. In fact, the smartphone helped Apple turn into the nearly trillion-dollar behemoth that it is today.
Yet, it is becoming much more unclear just how long Apple can count on one product and remain the dominant tech force that it has been since the smartphone’s launch over 10 years ago. Furthermore, a 20% decrease in iPhone sales would dramatically impact Apple’s top and bottom lines.
Lastly, more investors should begin to assess how long they think the iPhone can maintain its status as a prestige, premium product.
Investors will be pleased to see that Apple has slowly started to address its iPhone issue. Apple’s Services revenues climbed roughly 31% to hit $9.19 billion last quarter, making it the company’s second-biggest revenue generator, nearly outpacing iPad and Mac combined.
Services revenue accounted for roughly 15% of total Apple Q2 revenues, which is up 2% from the year-ago period and 5% from last quarter. Apple’s Services unit features the quickly growing Apple Music that now competes directly against streaming giant Spotify SPOT, as well as Amazon AMZN and more recently, Google GOOGL.
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