Apple’s (NASDAQ: AAPL) going to announce its second-quarter results later on tonight at 11pm GMT.
Now, I don’t know if you’ve noticed it… but there’s been a change in the way the press is reporting Apple over the last year or so.
The new story says Apple’s fast-growing days are over. As The New York Times put it, “even iPhone sales have their limits”.
The new story is that Apple has saturated the market for iPhones and it’s run out of ideas for new products. In other words, it’s become a value stock rather than a growth one. The stock has lost 18% of its value in the last year.
To get a sense of what I mean, here are some of the headlines from the last earnings call in January:
The Guardian: Apple iPhone sales flatline as growth falls well short of expectations
Bloomberg: Apple Falls After Forecast for First Sales Drop Since 2003
The New York Times: Looking for Signs That Apple’s Runaway Growth Is Waning
Today I want to talk about why a lot of that talk is overblown – and what to make of those earnings later on today.
The iPhone company
So the first thing to remember about Apple is that it’s basically the iPhone company.
In the last quarter of 2015, Apple made about $2bn from the Watch, $7bn from Mac computers, $4bn from the iPad, and $32bn from the iPhone.
Nothing comes close to the iPhone. To understand what’s going on with Apple’s share price, or whether the company’s results which come out later on tonight are any good, you need to understand how iPhone sales work.
Apple has released five fully remodelled iPhones so far. It releases them every second September. So far, every iPhone launch has been a smashing success. Sales have beaten the market’s expectations every time. iPhone launches are why Apple is the most valuable company in the world.
In the year in between full redesigns, Apple upgrades the innards of the iPhone. For example, the iPhone 6 was launched in September 2014, and its internal features got upgrades for the iPhone 6S in September 2015. These “mini launches” keep sales ticking along.
Even though the launches are officially kept secret, iPhone customers have figured out when to expect the new models. So they delay buying an iPhone until the fully refurbished model comes out, if they can. That’s why the new iPhone launches have gotten bigger and bigger (the iPhone 6 launch was by far the most successful yet). And it’s why sales tend to dip in the quarters leading up to the launch.
So that’s the background…
The long run trend
Is it fair to say, as The New York Times and The Guardian have said in the articles above, that iPhone sales are slowing down?
I don’t think that’s right. They’re saying iPhone sales are slowing down because they’re down on sales from the previous year.
Fair enough, you might say.
But the previous year was 2014, the launch year of the iPhone 6. It was a huge, exceptional year for iPhone sales. It’s not a good comparator.
Instead of 2015’s sales, look at the long term trend for iPhone sales. The tech analyst Ben Thompson has run the numbers: if you were to project forward the trend from 2008 to 2014 (ie Apple’s go-go years), you would expect Apple to sell 178 million phones in 2015 and 184m phones in 2016.
In reality, Apple sold 230 million iPhones in 2015. And this year it’s sure to sell a lot more than the long term trend number of 184m. Even if it doesn’t match 230m.
In other words, the iPhone is growing even faster than the trend it was on from 2008-2014. iPhone growth isn’t slowing down.
This September Apple’s going to launch the next big iPhone redesign, the iPhone 7. It’ll be hoping that the reason sales so far this year haven’t kept pace with 2015 is because everyone’s waiting for the new model.
So Q2 results get released later on tonight. What would be a good number for iPhone sales?
Well, the high water mark is 61 million phones sold, in Q2 2015. It’s not going to hit that this time around. The market is estimating around 50m phones sold.
Based on that number, tomorrow morning you’ll probably see a lot of headlines to the effect that Apple is struggling, or it’s done growing. All of those articles will be comparing this quarter to last year’s.
But dear reader, you’ll know they’ve gone wrong. Take the long-term view. Apple’s still going strong.