The iPhone has long been the crown jewel of Apple's business, bringing in billions of dollars in revenue and profit every single year. The company has continued to see sustained demand for its phone in major markets, including China, which remains one of the world's most lucrative smartphone markets.
However, there are challenges on the horizon for the iPhone, in part due to Apple's laziness on phone design. Industry watchers are predicting that this going to have a significant impact on the company's bottom line going forward. Barclays has downgraded Apple stock to underweight and trimmed its price tag due to slow iPhone 15 sales in China and expected weakness for iPhone 16 sales in 2024.
Apple shares fell nearly 4% following the downgrade, the steepest drop that the stock has suffered since August 2023, while shares of its suppliers in Asia such as TSMC and Foxconn also dropped. Apple's shares have seen their second straight day of decline today, highlighting the market's fears that significant challenges lie ahead for the company.
Barclays analyst Tim Long wrote in a note to investors that “We are still picking up weakness on iPhone volumes and mix, as well as a lack of bounce-back in Macs, iPads and wearables,” adding that “The biggest takeaway from the latest checks is incrementally worse [iPhone 15] data points out of China, together with developed markets remaining soft.”
Apple's revenue from iPhones already declined by $5 billion in 2023 compared to 2022 and this trend may continue. Long expects this reduced demand for iPhones to continue even after the company launches the iPhone 16 later this year as the latest model isn't expected to bring any major upgrades compared to the iPhone 15.
Even the services business, which brings in billions through Apple's various subscription services, is now facing challenges. Long points out that the services business faces significant headwinds in the months ahead, including mounting pressure on Apple to allow developers to offer third-party payment options, threatening its 30% App Store cut.
Also under threat is Apple's secret agreement with Google. The internet search giant pays Apple billions of dollars per year to have Google be the default search engine on its devices. The Department of Justice continues its antitrust case against Google and the possibility exists that Google may be prevented from paying companies to remain the default search engine. It would take away another major source of revenue for Apple.
Granted that it's been a tough couple of years for all industries, but the argument can be made that Apple's challenges are also a result of it effectively giving up on innovation for smartphones. The company has been focusing on growing its services business, which earned $85 billion in 2023, and no longer seems to be as focused on making major changes to the iPhone as it used to be in the past.
It's no secret that Apple has made next to no major design changes for the iPhone over the past few years. It launches new models every year with the majority of the changes being made under the hood. There's no indication that Apple plans to keep up with the industry that's rapidly embracing innovative new form factors such as foldables.
To its credit, Samsung realized that a saturation point had been reached in the high-end smartphone market and that something different needed to be done so that customers had unique devices to choose from. It has capitalized on that first-mover advantage to maintain a nearly 80% share of the global foldable phone market. Some Chinese manufacturers are now trying to compete with Samsung but they remain unable to challenge it at that scale.
Perhaps iPhone owners have had enough of Apple's lazy attitude towards phone design. They may upgrade to a new iPhone every year but they get something that looks roughly the same as the one they already have. They also don't get any new options from Apple so there's nothing in the company's lineup that will excite them, as is the case with foldable phones in Samsung's lineup, one that continues to become stronger with every passing year.
Apple has taken a different direction for its bold hardware bet. The Vision Pro AR/VR headset is unique in the sense that there aren't any other mobile device manufacturers that are making something similar right now. However, the headset can only be categorized as an enthusiast device, since its $3,499 price tag means that you won't have a lot of average customers buying it. It's going to take some time before the Vision Pro, or at least a watered down version of it, becomes a mass market product enough for Apple to plug the revenue gap that the iPhones are now creating.
Now a stock downgrade from an investment firm itself isn't a final judgement that Apple won't be able to turn things around from here, but it's an indictment of the company's decision to rest on its laurels. The momentum seems to be waning and it appears that the iPhone can no longer keep bringing in sales at the level it used to simply because it's an iPhone.
If Apple wants to turn around its fortunes in the global smartphone market, it's going to need to become more aggressive. This will require going above and beyond with its yearly refreshes, as minor cosmetic changes and the lack of new options in the lineup are only going to frustrate customers, particularly as they see what other companies like Samsung are offering their customers. There's only so much that Apple can do to keep customers in the ecosystem.
Even though it may seem impossible to even imagine, it's not uncommon for people to escape the walled garden and start fresh elsewhere. That's why we see Samsung focusing so much on improving the Galaxy ecosystem, and it has made incredible strides over the past couple of years. Samsung is surely sensing an opportunity here and it intends to make the most of it to get as many people to switch over from Apple as it possibly can. Will the empire strike back? Only time will tell.
