Every investment has risk -- period. Whether you're talking about some hot speculative tech stock or an established giant that generates tens of billions of dollars in free cash flow each year, there's always a chance that things go south, leading to significant stock price declines.
Apple ( AAPL 3.55% ) is no exception. The tech titan's shares have shed more than 26% of their value since their apex earlier this year, after the company issued revenue guidance for its peak quarter that was below analyst consensus. A string of bad news related to sales of its latest iPhones hasn't helped matters.
Here, I'd like to take the opportunity to highlight a key risk factor for Apple stock that current and prospective investors in the company should always be keenly aware of.
Betting it all on iPhone
Apple is as large and as profitable as it is today -- it generated almost $266 billion in revenue and close to $60 billion in net income during its recently ended fiscal 2018 -- substantially due to the success of its iPhone business, which saw revenue surge 18% from the prior year, hitting a new record.
Another thing to consider is that unlike many of its peers in the smartphone market, Apple only releases a handful of flagship devices once per year. Those devices need to resonate with consumers, otherwise the company's iPhone segment -- and, ultimately, its entire business -- could suffer.
Many of Apple's competitors, on the other hand, more regularly launch new devices. China's Huawei -- which overtook Apple in terms of smartphone unit shipments in both the second and third quarters of 2018, according to IDC -- launches a wide range of products from the low end to premium flagships and releases multiple waves of flagship devices each year.
For example, Huawei launched the P20 and P20 Pro flagship devices back in March and then released the Mate 20 family in October. Samsung (NASDAQOTH: SSNLF) does something similar, as it launches its Galaxy S series devices in the spring and then its Galaxy Note device in the fall.
It seems that this year's iPhone lineup -- and, in particular, the iPhone XR that replaced both the iPhone 8 and iPhone 8 Plus -- isn't resonating as well with consumers as the company had hoped. The Wall Street Journal recently reported (subscription required) that "[in] recent weeks, Apple slashed production for all three of the iPhone models it unveiled in September."
The report had some particularly bad news for the iPhone XR, as you can see in the following passage (emphasis added):
Forecasts have been especially problematic for the iPhone XR, Apple's new lower-price model. Around late October, Apple slashed its production plan by up to a third of the approximately 70 million units it had asked some suppliers to assemble between September and February, people familiar with the matter said.
And in the past week, Apple told several suppliers that it cut its production plan again for the iPhone XR, some of the people said Monday, as Apple battles a maturing smartphone market and stiff competition from Chinese producers.
The Wall Street Journal also reported that Apple is "moving to offer subsidies to mobile-network operators in Japan to shore up sales of its least-expensive new smartphone," something that the article describes as a "de facto discount of the handset in Japan."
Apple is heavily dependent on its iPhone business, and that business relies significantly on the success of a handful of new iPhones that are introduced each fall. If those latest iPhones aren't well-received, then the company could be in for a rough year.
We'll get our next official look at how Apple's iPhone business is doing when the company reports earnings either in January or February (although it is no longer planning to share iPhone unit shipment data with its investors), but so far the signs don't seem encouraging.