Apple (NASDAQ:AAPL) stock has now fallen about 37% from its peak primarily because its strategy and leadership have proven to be colossal failures. In the latest sign that AAPL is in big trouble, it announced yesterday, via a letter to owners of Apple stock by its CEO, Tim Cook, that its fiscal first-quarter revenue would come in well below its previous guidance.
I warned way back in Feb. 2016 that, “under Tim Cook’s leadership, Apple has become a one-trick pony whose trick is weakening.” And in Nov. 2018, I stated that, “Apple’s decision to avoid disclosing iPhone unit sales in the future indicates that it believes that sales of the device are going to decline going forward.”
I said more recently that Apple is facing tougher competition from Chinese smartphone makers and a less hospitable macro environment in China, along with stepped-up competition from Fitbit.
Cook Leaves Inaccurate Impression
In his letter to shareholders, Cook tried to leave the impression that China’s macro problems were the primary cause of Apple’s woes.
The first sentence under the first main heading of the letter was, “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” Cook then inserted a lot of information about China’s economic problems.
But it’s hard to believe that macro issues in China were the primary cause of the guidance shortfall, since Nike (NYSE:NKE) at the end of last month announced that its sales in China had jumped by double-digit percentage levels and Starbucks (NASDAQ:SBUX) disclosed at the beginning of November that its comparative sales in its region dominated by China had risen 1% year-over-year.
If macro issues in the country (which accounted for only 19% of iPhone unit sales a year ago) were so terrible, then Nike and Starbucks’ recent results in the country would have been much weaker.
China’s macro issues, although likely responsible for a meaningful part of Apple’s miss, do not appear to have been primarily responsible for the fact that the company missed the midpoint of its revenue guidance by 7.5%.
Importantly, later on in the letter, Cook admits that:
“While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be” (emphasis mine). So one doesn’t have to read between the lines to see that iPhone demand in multiple markets outside of China also came in well below expectations.
The Real Problems Facing Apple Stock
As I noted in a previous column, Cook has emulated former Microsoft (NASDAQ:MSFT) CEO Steve Ballmer by trying to pump up Apple’s results and Apple stock with gimmicks rather than with effective innovation and superior products.
Among Cook’s gimmicks have been large increases in iPhone prices to make up for a lack of unit sales growth and (seemingly and allegedly) relying on the device’s battery issues to force many consumers to buy new iPhones or expensive new batteries.
Both of those gimmicks have failed, as gimmicks often eventually do. High iPhone prices have obviously badly hurt demand for the product amid stepped-up competition (particularly in many countries outside of the U.S.).
In his letter, Cook confirmed that among the “other factors” that negatively affected Apple’s results were “some customers taking advantage of significantly reduced pricing for iPhone battery replacements.”
Meanwhile, Apple Watch, which has many deficiencies in comparison with Fitbit’s (NASDAQ:FIT) smartwatches, had a paltry 13% market share in Q3, not far ahead of Fitbit’s 10.9%. And Roth Capital stated recently that Fitbit probably had “strong holiday sales.” That does not bode well for Apple Watch nor Apple stock.
And as I’ve stated multiple times in the past, under Cook, Apple has not launched game-changing, new products. He hasn’t gotten a competitor to Netflix (NASDAQ:NFLX) or autonomous car software off the ground, nor has anybody been really wowed by any of the features that have been added to iPhone during his tenure.
The Outlook for Apple Stock
Obviously, the growth of Apple’s Services business is not going to be the savior of AAPL stock that bulls were predicting it would be. And AAPL recently received more bad news on the Services front, as Netflix is successfully avoiding paying Apple’s app store tax. I’m sure it won’t be long before many other app makers follow suit.
As I noted in a previous column, “In 2017, App Store generated about $11.4 billion of revenue for Apple, representing almost 5% of its total top line and about a third of its Services revenue.” So we’re not talking about negligible amounts of revenue t for Apple.
To predict where the misery will end for Apple stock, I think looking at the performance of Microsoft stock under Steve Ballmer is a pretty good, if imperfect, model. Like Microsoft then, AAPL now is going to disappoint a lot of investors and it’s not going to do any great things. It could very well have multiple, failed initiatives, but on the other hand, it’s going to keep selling a lot of products.
In December 1999, at the height of tech euphoria, Microsoft stock peaked around $58.50. In May 2006, around the time that the Street finally became convinced that Microsoft under Ballmer was a lagging loser, MSFT stock had sunk to around $22.50. That’s a decline of about 60%.
In August 2018, at the height of FAANG euphoria, Apple stock reached a high of $227. A 60% decline from that level would put Apple stock around $90. I think that’s a pretty good price target for Apple stock for a year or two from now, assuming that Cook isn’t fired well before then.
As of this writing, the author owned shares of Fitbit.