In the last five years, Apple has failed to find a new source of growth to replace its maturing iPhone. And that means the cycle of shrinking revenues and squeezing suppliers will continue.
Besides Apple's emotional hold over some customers, is there any other reason to keep holding its stock?
To be fair, the iPhone has generated a huge amount of profit for Apple since it was launched in June 2007. "We do track iPhone operating profit and margin on a quarterly basis. From 2007 through Q2 2016, the iPhone’s operating profit totaled $214 billion -- with an operating profit margin of 34.5%," according to Strategy Analytics spokesperson Linda Milewski.
Indeed, the iPhone was a huge contributor to Apple's revenues -- having sold over a billion units since launch -- and profits in its fiscal 2015. That year, the operating profits from the iPhone jumped 52% from $102 billion to $155 billion -- accounting for 66% of Apple's total sales of $233 billion.
But there are about 1,000 smartphone makers in the world and they are fighting over a shrinking profit pool.
Indeed Apple is suffering a profit slump as rival Samsung beats it to the market.
According to the Wall Street Journal, "In the fiscal third quarter, Apple saw its profit slump 27% from a year earlier on weaker sales, especially in China. Rival
Apple's recent profit plunge is the most extreme manifestation of a trend of declining operating margins.
Indeed, while Apple enjoyed a string of rising operating margins in the first few years of the iPhone -- from 18.4% in fiscal 2007 to 35.3% in fiscal 2012, Apple's operating margins have since declined to 28.6% in the last 12 months, according to Morningstar.
Apple plans to reveal a new iPhone next week. But the pressure Apple is putting on its suppliers to cut output and prices suggests that this product launch is not likely to offset its revenue declines.
In China -- which was Apple's last bastion of iPhone growth -- mobile carriers are slashing prices below Apple's list price.
According to the Journal,
Apple is demanding that its suppliers cut their output and their prices -- telling the suppliers that the volume cut is temporary and will be reversed once Apple introduces new products.
However suppliers are skeptical. "Given that iPhone sales have been falling this year, suppliers say they are wary about betting on a smash hit. The demands for discounts have irked some suppliers, many of whom get a large proportion of their sales from iPhone parts," noted the Journal.
These cuts are hurting the financial results for Apple suppliers. According to the Journal, an Apple iPhone assembler Pegatron expects a 10.5% to 14% decline in its third quarter iPhone assembly business. And Foxconn -- which suffered a margin decline from 3.4% to 2.3% in the second quarter -- reported a 31% profit plunge in the quarter.
As it continues to suffer declining iPhone revenues and profits and fails to generate new products to make up the difference, Apple's suppliers are going to scramble to lessen their dependence on Apple.
The result will be suppliers who are less willing to satisfy Apple's demands for further price cuts.
And as Chinese carriers continue to slash iPhone prices and rivals like Samsung beat Apple to market with profitable new models, Apple's profits will be triply squeezed by declining volume, lower prices, and relatively constant input costs.
If Apple launches into a gigantic new market a product that is much better than competitors' -- adding at least $50 billion to Apple's top line -- then there is no need to worry about this profit doom loop.
I think that the probability of this happening is pretty close to zero. And therefore investors should expect Apple's profit decline to accelerate.
