As rare as last week’s Apple revenue warning from CEO Tim Cook may have been — the company last issued a revenue warning in June 2002 — the company has had other bad quarters in the iPhone era. Look no further than the stock chart:

Apple's stock price in the iPhone era

Three troughs stand out:

  • In fiscal year 2013 (the iPhone 5 cycle), Apple’s year-over-year revenue growth slowed to 18%, then 11%, 1%, and 4%; this was a dramatic slowdown from 73%, 59%, 23%, and 27% the year before. Worse, net income growth actually went negative (0%, -18%, -22%, -9%) thanks to a significant drop in margin.
  • In fiscal year 2016 (the iPhone 6S cycle), Apple’s year-over-year revenue growth went negative (2%, -13%, -15%, -9%); again, net income was worse (2%, -22%, -27%, -19%), thanks in part to a $2 billion inventory write-off.
  • This year does project to be the worst first quarter of all three: a -5% revenue decline, and -1% net income decline; this decline comes after last quarter’s announcement that Apple would no longer disclose unit sales, which precipitated the current slide in the stock price.

Why?

Error 1: China and ‘S’ Cycles

Error 2: Non-Flagship iPhones

Error 3: iPhone Destiny

Reasons for Optimism

The good news for Apple is that, to the extent these errors really were predictable, there is nothing structurally different about the company’s competitive position today versus six months ago, when the current stock slide began.

  • The next iPhone hardware revision should sell better in China, simply by virtue of being new (and the implication of it being easy to switch away from iOS is that it’s easy to switch back).
  • Customers still prefer Apple’s flagship iPhones, no matter how expensive they are.
  • Headwinds like currency and battery replacement programs will go away, and phones, thanks to their centrality in people’s lives as well as the greater likelihood of harm, will always have a faster replacement cycle than PCs.

Meanwhile, the company’s Services business continues to grow, along with its installed base (including in China); the company is clearly putting more strategic emphasis in this area, effectively abandoning also-ran hardware products like HomePod and Apple TV to increase the reach of its services. I would expect significant announcements in this area through 2019.

That is not to say the company is finished with hardware: wearables are a huge area of growth, as both AirPods and Apple Watch are big successes, and it seems likely that an augmented reality product is coming in the next few years. Nothing will match the iPhone, but that’s ok; the sky is not falling, only the stock.

https://stratechery.com/2019/apples-errors/