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Apple Is Still Mostly an iPhone Company. That's Becoming a Problem.

By James Brumley - Feb 5, 2021 at 7:00AM

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The world's biggest company is still the world's most profitable company. But past performance is no guarantee of future results.

Apple (AAPL 4.01%) is still slugging it out of the park. Last quarter's top line grew 21% year over year to a record-breaking level of $111.4 billion, while earnings grew 35% to $1.68 per share. Both were readily better than analyst expectations, proving this outfit is still the biggest company in the world for good reason.

Drilling into last quarter's numbers, however, a curious detail sticks out. Try as it might to grow a little less reliant on its flagship product, Apple is still first and foremost an iPhone company. The lopsided revenue mix isn't going to wreck the company, but some subtle shifts in the organization's smartphone business should be on investors' radars.

Imbalanced scale, teetering to one side.

Image source: Getty Images.

The good news for Apple

Apple no longer offers unit-level sales data on its iPhone, but it does offer total quarterly revenue numbers for the popular device. iPhone sales reached a record-breaking $65.6 billion in the fiscal quarter ending in December -- nearly 60% of last quarter's revenue -- up 17% year over year. Not bad.

Just because the company doesn't disclose the data, however, doesn't mean others aren't gathering their own data.

Case in point: Technology market research outfit IDC estimates Apple delivered a total of 90.1 million smartphones during the fourth quarter of last year, up 22% year over year, and easily outpacing its rivals. Even Samsung couldn't combat the hype stirred up by October's unveiling of the iPhone 12 and iPhone 12 mini, which hit store shelves in November. Counterpoint Research essentially concurs with IDC's data, estimating shipments of 81.9 million iPhones, which is still far greater than Counterpoint's count of 62.5 million Samsung phones.  In short, Apple is still the king of the fourth quarter, when the company typically shines the most. Some analysts even characterize the three-month stretch as "a masterpiece," even if that leadership tends not to last on a full-year basis. In that Apple arguably monetizes its loyal fan base better than any other name in the business, any strong quarter is interpreted as an enormous win.

But if you think the company's iPhone business is as strong as it's ever been, think again.

The bad news for Apple

Two red flags are waving here, for Apple fans who care to take notice. One of them is the slowing pace of the iPhone's revenue and unit growth.

Yes, Apple broke records for both measures for the quarter ending in December. Keep things in perspective, though. That surge follows two years' worth of sales that slipped below what ended up being a multi-year sales peak in late 2017 and early 2018.

Apple's iPhone deliveries surged last quarter, but the bigger trend is still one that's weakening.

Data source: IDC. Chart by author.

Apple's iPhone revenue surge last quarter was out of character with the bigger, falling trend.

Data source: Apple. Chart by author.

In other words, last quarter's big numbers may represent pent-up demand rather than net growth. The sustainability of this strength remains in question.

And that concern puts another worry in play -- the number of total worldwide iPhone users is slowing. If the end goal is offsetting slowing iPhone sales growth with more revenue from apps, on-demand video, and cloud-based services, the company is running into headwinds here, too.

During last week's conference call, Apple touted that more than 1 billion iPhones are now in regular use. That's 100 million more than the 900 million the company disclosed it had surpassed as of early 2019. But the infrequent updates from the company make it challenging to identify the true trajectory of this base. Fortunately, market research platform Above Avalon gathers data to generate more frequent estimates. It's not only confirming that Apple's disclosure of 1 billion iPhone users is on target, but it shows a clear slowdown of this crowd's growth. Above Avalon's historical data also jibes with Apple's and others' occasional tally update, lending credibility to this more frequently updated figure.

Apple's iPhone user base growth is slowing down. Services' growth may slow down next.

Data source: Apple, NewZoo, Above Avalon. Chart by author.

This slowdown makes sense given another data nugget from Above Avalon. That is, the number of iPhone sales resulting from upgrades reached a record-high 81% last year, while sales of the smartphone to consumers who didn't already own an iPhone hit a record low of 19%.

These loyal customers arguably represent the consumers most likely to use their device to buy digital services. Underscoring this idea is the fact that while iPhone user growth is slowing, services revenue isn't (at least not yet). Nevertheless, there are plausible limits to how much service revenue the company can extract from each iPhone user.

The bottom line for Apple

Don't overreact to the message. The iPhone's user base is still growing. Service revenue is still growing. Apple's worst results are still enviable compared to most other companies.

But don't ignore the fact that a couple of key trajectories are flattening, either. Most big trends start out as small ones. While the ones discussed above might not flatten out to uncomfortable trajectories until 2023, Apple's investors aren't seeing a clear long-term growth plan for what still accounts for about half the company's total business.

It's never wrong -- or too soon -- to at least ask questions.

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