Shares of Apple (AAPL +0.04%) have been under pressure of late on account of multiple factors, such as reports of a ban by Chinese state-owned enterprises on the use of iPhones by their employees, weak consumer demand for smartphones, and rumors that the iPhone maker may run into supply chain challenges that could force it to reduce the number of smartphones it builds this year.
And now, Wall Street doesn't seem to be impressed by Apple's latest iPhone 15 lineup, which was revealed on Sept. 12. Apple stock retreated nearly 2% after the launch event. Though shares of the tech giant are up 35% so far in 2023, they have pulled back nearly 10% since the beginning of August.
With all the headwinds that Apple is facing right now, should investors consider booking their profits before the stock slides further? Let's find out.
NASDAQ: AAPL
Key Data Points
iPhone 15 sales prospects don't look too bright
Apple started taking pre-orders for its iPhone 15 models on Sept. 15, and they have been available in stores since Sept. 22. The tech giant has traditionally released its iPhones during September to capitalize on the usually strong holiday shopping season that arrives in the final quarter of the calendar year. However, there are a few challenges that could keep the iPhone 15 from setting the market on fire at the end of 2023.
One of the primary challenges is that Apple is reportedly expected to produce fewer iPhone 15 units this year. Japanese investment bank Mizuho estimates that Apple could end up building 73 million units of its latest smartphone lineup as compared to the earlier forecast of 84 million units due to supply chain problems. The firm adds that Apple's 2023 iPhone production could top out at 217 million units, down from the earlier estimate of 227 million units.
Apple shipped an estimated 226 million iPhones in 2022, according to market research firm IDC. Its smartphone shipments in the fourth quarter of 2022 stood at just over 72 million units. So, Mizuho's updated production estimate suggests that Apple may hardly enjoy an uptick in iPhone shipments in the fourth quarter of calendar 2023.
Apple has raised the starting price on just one of its models. The iPhone 15 Pro Max now starts at $1,199 vs. $1,099 for its predecessor last year (though it now has double the storage capacity). As a result, the company may not enjoy much of a bump in the average sales price (ASP). It is worth noting that a nice bump in Apple's iPhone ASP has helped the company defy the slowdown in the smartphone market to some extent.
For instance, the company's iPhone revenue is down just 3.6% in the first nine months of the ongoing fiscal 2023 to $156.8 billion, accounting for 53% of its top line. The overall smartphone market, on the other hand, has witnessed an 11% drop in shipments in the first half of 2023. With global smartphone shipments expected to decline 6% in 2023, according to Counterpoint Research, the end-market conditions don't appear to be conducive for the iPhone 15 lineup.
What about the upgrade cycle?
Wedbush Securities analyst Dan Ives estimates that of Apple's installed base of 1.2 billion iPhones, 25% are now in an upgrade window as they are using devices that haven't been upgraded in four years. According to that estimate, the iPhone 15 lineup could move as many as 300 million units. But Apple will have to produce enough units to ensure that it could lure those customers into upgrading, as long waiting times on account of higher demand and supply chain bottlenecks could eventually cause potential consumers to lose interest in the devices.
Additionally, there are concerns that Apple's move to remove the lightning port in favor of a USB-C type port to fall in line with regulations in the European Union (EU) could slow the potential upgrade cycle. It remains to be seen if such a change actually keeps users from upgrading. However, given that updates to the new iPhone 15 lineup are considered mostly incremental, there is a chance that Apple's existing installed base may give the device a miss if the company is unable to quickly ramp up production.
In all, Apple's new iPhones may not turn out to be a runaway success and the stock could remain under pressure in the final quarter of the year if the challenges discussed above indeed bog down the sales of the new devices. More importantly, a drop in iPhone sales would weigh on Apple's overall financial performance considering the influence of this product on its top and bottom lines.
Analysts are expecting Apple's revenue to decline almost 3% in the ongoing fiscal year to $383 billion. Its performance is expected to improve slightly in fiscal 2024 with a 6% revenue jump. But that would depend a lot on how the company's new iPhone performs at the sales counters and if it can produce enough of them.
The good news for Apple investors is that the pre-orders for the new iPhones seem to be stronger than last year. Wedbush estimates that iPhone 15 pre-orders are tracking 10% to 12% higher than last year's iPhone 14 models. More importantly, a major portion of the demand is for the higher-priced Pro and Pro Max models, which may lead to a slight bump in the ASP. It is also worth noting that Apple is witnessing robust growth in emerging markets such as India, where pre-orders have reportedly jumped 25% over the prior year, and that's a positive given the lucrative revenue it could generate from that country.
Another factor that could be driving higher iPhone 15 demand is the growing adoption of 5G smartphones. Apple reportedly controlled 24% of the global 5G smartphone market at the end of last year, according to ABI Research. This could be a secular growth opportunity for Apple in the long run considering that global 5G smartphone penetration could jump from 13% last year to 64% in 2030.
So, even though sales of the new iPhones may get off to a rough start if Apple cannot produce enough of them, there is enough evidence that points toward healthy demand for the company's smartphones in the future. Now, investors may be tempted to book profits in this tech stock as its most popular product may not be able to pull out of the rut it is in, at least in the short run, but that could open a buying opportunity for savvy investors looking to set their portfolios up for long-term gains.
