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Warnings Signs That Apple Inc. (AAPL) Must Not Ignore

Apple Inc (NASDAQ:AAPL) Apps

Apple Inc. ’s 2Q 16 quarter earnings report was not good. iPhone sales not only declined year-over-year for the first time, but the management also issued a shocking guidance for the next quarter, suggesting another difficult quarter for the iPhone sales.

Apple Inc (AAPL) iPhone

Management – on the 2Q16 earnings call – blamed demand for the iPhone 6 and 6 Plus and the weak economy worldwide as the two main reasons for the declining iPhone sales. Even though, there is a tangible evidence to support some part of that claim there are still doubts that all could be blamed to just two iPhone models, weaker economic conditions and currency fluctuations.

There are several more factors or “warning signs beginning to appear in the iPhone business indicating underlying deterioration,” notes a report from CNBC

Longer iPhone Upgrade Cycle

The primary reason behind the success of the iPhone has been the regular upgrade of the devices by the iPhone users (every two years). Nevertheless, there are some signs that the upgrade time is actually longer than two years. Apple CEO – Tim Cook – has given updates related to the percent of iPhone installed base as of 2014 that upgraded to a larger iPhone, such as iPhone 6, 6 Plus, 6s, or 6s Plus.

About 60% of the iPhone users (who bought in September 2014) have not upgraded to a larger iPhone at the end of 2015. The iPhone installed base is instead on a minimum 3-year cycle, the report says. For Apple, another problem is the upgrade time – the longer the remaining 60% of the installed base delays an iPhone upgrade, the longer extends the upgrade cycle.

Disappearing iPhone growth catalysts for Apple

The growth catalysts of the iPhone are either slowing down or disappearing, which is another warning sign.

Mobile carrier expansion has been a significant contributor to the iPhone sales growth over the years. Apple Inc. ’s addressable market expanded as it brought its devices to new mobile carriers. China Mobile started selling the iPhone in early 2014 for the first time, and opened up hundreds of millions of new consumers of which tens of millions were in a good position to purchase the iPhone.

The problem now is, there are no additional carriers like China Mobile left. Most of the global population is now on a mobile carrier that sells iPhone, the report says.

Recently, India has been positioned as the next big growth engine for the iPhone, but India is not the next China, and Apple’s optimism has been misplaced badly. Even Cook agreed during the 2Q16 earnings call that the smartphone market in India currently is where China was 7 to 10 years ago.

“That comment is not too reassuring for anyone thinking India would pick up the sales slack from a slowing China market,” the report said. Given Apple’s current pricing strategy, India is not in the right position to represent a significant driver for sales of iPhone units, the report says.

Over the past year and a half, Apple Inc. has been successful in influencing the premium Android switchers with larger iPhones, but there are signs that growth in terms of Android switchers is ending. Apple needs to come with cheaper iPhones to attract more people and achieve the same kind of user growth. Approx. 1.2 billion people bought a non-iPhone smartphone in 2015 whereas 1 billion people bought non-iPhone smartphone in 2014.

Dropping margin and ASP

Management attributed a part of its weak guidance to the iPhone SE impacting iPhone ASP and margins. Despite rivals facing worsening condition, both of those metrics had held up quite well over the past two years. A significant push was provided by the higher price “Plus” iPhone model, but the iPhone SE can be seen as a threat to these two metrics.

Apple really needs to think hard about these warnings, before its get too late. One of Steve Jobs famous quotes, does quite well to sum up Apple’s current position. “If you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what’s next.”

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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