Once one of the strongest-growing businesses of the 21st century, Apple (AAPL +1.08%) can no longer claim the title of the world's most valuable company. While second place hardly constitutes a fall from grace, investors may be wondering what the tech titan's path forward will be. In the past, Apple's annual release cycle consistently offered either new devices or significant improvements to existing products. Today, it's quite difficult to tell a 2019 Mac apart from a 2023 Mac, and even the last five iPhones have not seen any major design changes.
While some product launches provided more growth than others for Apple, the general philosophy under co-founder and CEO Steve Jobs and design chief Jony Ive always aimed to improve the brand's perception. During Ive's 27-year career in Apple's design department, the company went from large plastic casings to precision machine aluminum. In the five years since his departure, Macbooks and iPhones alike have gotten thicker, heavier, and larger than ever before.
There are now two questions to consider before investing in Apple:
- Has design stagnation led to apathy among consumers who once waited in line for hours to buy its newest products?
- Can Apple's new foray into spatial computing help the company get back to its old self, or will it become just another contender in the space?
The bad Apples
Fiscal 2023 -- which ended Sept. 30, 2023 -- saw Apple's sales markedly decrease across many products, including Macs, iPhones, iPads, and Apple Watches. For each of the different devices, lower sales stemmed from unique factors. In other words, it wasn't simply a result of tightening economic conditions reducing consumer spending.
For the iPhone, despite the release of the iPhone 15 models, many consumers saw very little reason to upgrade. The new phones replaced Apple's longtime Lightning connector with USB-C and added slight processing and camera improvements. The premium versions received titanium bodies. This marked the seventh year in a row in which the phone's features and form factor changed incrementally, even though the new models' prices increased.
NASDAQ: AAPL
Key Data Points
In the case of the Mac, processor upgrades did little to drive interest, and unit sales dropped by 11%. This is likely because the new Macbooks are functionally indistinguishable from the previous two years' models. Base models also still cannot support more than one monitor, which significantly limits users who need multiple screens for productivity. This has been an issue since Macbooks switched away from Intel CPUs to Apple's M-series chips.
As for the iPad, 2023 marked the first year since that product's debut in which Apple did not release a new model. The result? A 15% decrease in unit sales from 2022 and insufficient marketing for the product line.
The ladder up the Apple tree
Initially, Apple's business model focused on offering only the newest version of a product and discontinuing older iterations to avoid price cuts. This also meant the company could cut costs on supporting older models by decreasing the number in circulation. As of the release of the iPhone 14 series in 2022, however, Apple began offering the 13 and 12 as more affordable alternatives to the newest model. This continued in 2023 with the launch of the 15 series, with the 14 and 13 becoming the less expensive variants.
Apple has also been branding even more affordable products as "SE," beginning with with the iPhone SE in 2016 and followed by the Apple Watch SE four years later. With significantly more models of iPhone, iPad, Mac, and Apple Watch, the company created its product ladder. Consumers now walk into an Apple Store expecting to buy an older model for a cheaper price but are then walked up the product ladder by seeing the incremental price and feature increases.
This ultimately leads consumers to that "Why not?" moment, where they wonder if the $100 saved is worth having to settle for inferior features.
Apple applied this strategy across most of the company's product sales and kept revenue steadily rising from 2019 to 2022 until last year's 2.8% decline.
Sowing the seeds of change
Though Apple has struggled to innovate on existing products, the launch of the new Apple Vision Pro in the first quarter of 2024 marks the company's foray into the augmented reality market. While Apple doesn't call the Vision Pro augmented reality, opting instead for "spatial computing," it has a long way to go before becoming competitive in the headset market.
Priced at a staggering $3,500, the headset is far out of reach for most consumers, but this is likely part of the company's ladder strategy. By introducing the Vision Pro at a high price, Apple opens up a timeline where it can release new versions, either as SE or legacy models, and slowly bring down the price over time. Whether this new product line will revolutionize personal computing and revive Apple's business growth remains to be seen.
Is Apple stock still a buy in 2024?
Despite revenue slipping in 2023, Apple shares rose 48% last year and nearly doubled the S&P 500's return. Unfortunately, the company's recent announcements regarding generative artificial intelligence (AI) have been greeted with a mixed reception from investors, with some expressing low confidence in the venture.
Moreover, though Apple's second-largest revenue source after iPhone sales is its software services like the App Store and Apple Music, even this golden egg isn't safe. As antitrust pressure mounts regarding the App Store and its 30% royalties for app developers, the EU Commission's $2 billion fine brings the company's longtime App Store practices into question.
Now might not be the best time to buy Apple shares. I'd wait until the company's new projects in augmented reality and AI mature. Yet those currently holding Apple have no pressing reason to sell the stock, even as hardware revenue slows, because software sales can help pick up the slack. I think investors should keep a watchful eye as Apple continues to transition its business model from leaning solely on hardware products to software services and beyond.
