SSR sees signs that Apple’s business model is ‘beginning to come apart’

Apple Earnings Analysis

Apple scored a small but much-needed victory on Tuesday when it posted fiscal third-quarter results that beat analysts’ consensus, sending the stock soaring as much as 5% during Tuesday’s after-hours session. Net profit and revenue both beat the Street’s consensus and Apple’s June-quarter iPhone sales crushed estimates. But not everyone is celebrating.

In a research note published on Wednesday evening, Sector & Sovereign Research analyst Artur Pylak noted that while there were some positive signs in Apple’s report, there are also a number of troubling trends developing. A few key points quoted from Pylak’s note:

  • iPhone units were 19% above projections, but ASPs were down 5.2% QoQ. iPad units were 16% light vs. expectations and last year, clear share loss in a fast growing market.
  • This is 3 straight quarters of sales deceleration and 5 quarters of falling margins. Margins dropped despite the positive mix shift toward iPhones. International sales were off hard.
  • 2014 consensus expects 12% sales growth and a recovery to 37.5% gross margins. Given the current trajectory and tough competition, AAPL needs an easier target.

“There are ample signs that the business model is beginning to come apart,” Pylak wrote. “This was the fifth consecutive quarter of declining gross margins, with guidance on the table suggesting further declines in the September quarter. Indeed, the mix shift toward the higher margin iPhones and away from the lower margin iPads OUGHT to have resulted in good margin news for 3QFY13. Sales were flat vs. the year ago quarter, a level considered disappointing even then, and decelerated for 7th quarter in the last 8.”

He continued, “4QFY13 guidance offers little hope for a break in the trends – the mid-point of guidance would have another 40bp sequential drop in gross margins and sales down 1.3% YoY. With vigorous competition in its core markets, and signs that the high-end smartphone market is slowing, business as usual for Apple may not be good enough to meet consensus projections that expect the company to return to double digit growth and reverse margin declines.”

The analyst noted that Apple is rumored to be “dabbling” in new areas such as TV and wearable computing, but it will find what he describes as fierce competition from Microsoft’s Xbox One as well as new offerings from Intel, Google and Amazon in the TV market. Where the “iWatch” is concerned, Pylak says Apple will “realistically be able to siphon only a small share of the $60B watch business whose revenues are dominated by luxury watchmakers crafting timepieces noted more for aesthetics than practical use.”

“Taken in full context, the quarter was anything but good for Apple,” the analyst concluded. “The decline in iPad sales within the high growth tablet market is sobering and reminiscent to Apple’s early pitfalls with Mac against the PC that ushered in the Wintel era. Apple’s pace of innovation has slowed with no major product announcements since last October, and none expected until the fall. Apple may have lost the interest of consumers. Execution in markets outside the US has been difficult with the existing business model and sales haven’t just slowed, they’ve declined in YoY and sequential terms. As a result we believe 2014 consensus estimates continue to be unrealistic given the company’s trajectory of decelerating sales and declining margins. A future of downward revisions and quarterly misses does not bode well for Apple investors.”

blog comments powered by Disqus