Tim Cook Says Apple Faces 2 Key Problems in Surprising Shareholder Letter
Apple CEO Tim Cook sent out a shocking letter to Apple shareholders on Wednesday revising down its revenue projections for the coming year. Translation? Two days in, 2019 is already shaping up to be a little rockier than the company expected.
“Our revenue will be lower than our original guidance for the quarter,” Cook’s letter reads. “While it’s disappointing to revise our guidance, our performance in many areas showed remarkable strength in spite of these challenges.”
So what’s going on here? Stocks trade on how much a company’s earnings go up or down, making announcements like these a meticulous exercise in expectation management. The less money everyone thinks Apple is going to make this quarter, the easier it is for Apple to leave investors feeling pleasantly surprised during the next quarter. There’s a reason financial journalism essentially runs on Goldilocks analogies.
But on the other hand, there are two key trends outlined in Cook’s letter that are definitely worth paying attention to, and not just for people who invest in Apple stock, as the famous analyst Mohamed A. El-Erian pointed out on Twitter.
##1. The Trade War
The first big takeaway from Cook’s letter is the insinuation that the so-called trade war the president has manufactured is creating some real problems, not just for investors but for consumers who might buy iPhones. Here’s the letter:
As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.
There’s a self-serving element to the role China plays in the letter. After all, the more blame Apple can deflect to economic headwinds, the less blame there is to cast on Apple’s own culture and products. Still, Bloomberg’s Selina Wang called it “some of the biggest evidence yet” that the trade war is impacting U.S. businesses.
2. Smartphones Are Increasingly a Tougher Sell
But the bigger, and arguably more important takeaway from the letter — at least as far as Apple goes — is the appearance of a concession that smartphones are getting to be a much tougher sell. Here’s the money shot:
While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.
In other words, iPhones are getting more expensive. There’s no one reason why this is happening, and not all of these are Apple’s fault. iPhones get more expensive when carriers aren’t as loose with the incentives, and a strong dollar makes iPhones pricier for foreigners. But Cook also concedes in his point about battery replacements that people may not be as quick to make upgrades. Even worse than a signal that iPhones are too expensive, that could be a sign that people are simply happy with the iPhones they have.
Neither the trade war nor the twilight of iPhone-inspired smartphone designs are exactly news. After all, there are only so many people in the world who can afford Apple’s high-end phones in the first place, and Apple’s been juicing that fruit for a decade.
Still, these trends are not exactly the kinds of trends where you expect to see Apple playing catch-up. At least one prominent Apple investor, Ross Gerber, took the downgrade as a sign that the company is not being as innovative as it needs to be in order to retain its industry advantage.
While the news was dropped after market close, after-hours trading for Apple stock fell about eight percent in response to the news as of 6 p.m. Eastern, according to Google Finance.
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