At the start of October Apple was on top of the world. The company had hit a record-breaking valuation of $1tn (£770bn), just released its fastest – and most expensive – iPhone and its chief executive, Tim Cook, was hammering rival Facebook over yet another privacy scandal.

Two months on and the shine appears to have worn off the largest company in the world. Its valuation has fallen by nearly 20%. This is partly because key suppliers have issued their own profit warnings, suggesting fewer people are buying the company’s phones than expected.

To be fair, Apple is not the only tech stock under pressure. There has been a wider rout in the sector over recent weeks, with Amazon, Netflix, Google and Facebook, which is as scandal-hit as ever, all suffering their own declines. Despite the decline, Apple is still a $900bn company.

But it poses a question: have we reached peak Apple?

Apple stock price

The case for is simple enough. For years, the iPhone has printed money. It sells in phenomenal quantities, with an average selling price (ASP) significantly higher than that of the competition, and gross margins to match. Until three years ago, sales were growing steadily with no end in sight.

Then, in 2016, with the launch of the iPhone 6s, that growth stopped. In the years since, it’s never really recovered. Fewer people are buying their first smartphone and fewer people are switching from Android to iPhone. In addition, iPhone users are taking longer to replace their devices.

Last year, Apple tried a new tactic: if it couldn’t sell more iPhones, it would sell the same number of phones but charge more for them. Enter the iPhone X, the first iPhone to start at £999. The expensive top-tier device also let the company smuggle in a price rise for the “cheaper” iPhone 8, which rose by £50 compared to the iPhone 7.

Average sales prices shot up as a result. The company’s valuation resumed its upwards trajectory, capping out this summer.

Then the wheels came off. Firstly, Apple signalled a little too strongly that sales figures might never recover, telling investors it would no longer release those numbers for individual product lines.

Avi Greengart, a research director at analytics firm GlobalData, said: “Apple has long complained that investors are overly focused on unit sales and not focused enough on Apple’s long term position – how services and platform strength will lead to future profits.

“Stopping unit sales disclosure is a blunt way of addressing the issue and investors understandably did not take the news well.”

That sparked the first tremble. But Apple gave a promise to investors: that sky-high ASP would continue, accompanied by growing revenues from services such as Apple Music, App Store purchases and iCloud subscriptions, as well as new add-ons such as the Apple Watch, AirPods and the HomePod to sell to committed iPhone owners.

In Apple’s ideal scenario, a typical iPhone owner may go from spending £600 every two years on one phone, to spending £999 every two years on the phone, £429 every two years on a watch, £169 every two years on some wireless headphones and £319 every three on a smart speaker.

But that plan is showing signs of weakness as well. For one thing, even a boost in ASP can’t cover a significant decline in sales. According to Linda Sui, a director at market research firm Strategy Analytics,that’s what’s happening. “Global smartphone shipments tumbled 8% annually from 393.1m units in Q3 2017 to 360m in Q3 2018,” she said.

“The global smartphone market has now declined for four consecutive quarters and is effectively in a recession.”

This decline comes as smartphone makers are struggling to come to terms with far smaller subsidies from carriers, longer replacement rates, growing stocks in several regions and a lack of exciting design innovation in hardware.

Sui’s analysis seems to be supported by the uncertain noises coming from key Apple suppliers. Lumentum, which makes parts used in the FaceID system on Apple’s newest phones, cut $70m from its revenue forecasts earlier this week. It blamed “one of our largest clients” for a fall in orders. Similar reductions were cited by two other suppliers, Japan Display and IQE.

On Wednesday, another report poured cold water on Apple’s prospects. An analysis by TechInsights and industry site The Information suggested that higher ASPs for iPhones hadn’t led to higher profit margins. The newest iPhones are more expensive to buy than previous devices but they’re also more expensive to make, according to The Information’s Aaron Tilley.

“The increase in component costs stems from the fact that Apple is packing more parts – and sometimes higher quality materials – into its devices,” Tilley said.

“The iPhone X, for example, has two motherboards instead of one. And following public complaints from customers about the iPhone 6 bending in some cases, Apple began using higher-end aluminium and eventually surgical-grade stainless steel to construct the iPhone XS and XS Max.”

But the trembles should be taken in context. The iPhone does still print money, pulling in the majority of Apple’s $60bn in annual revenue.It continues to sell in very high numbers, especially for a product that sells for an average of $800.

Forrester Research’s Thomas Husson said the death of the smartphone has been exaggerated. “This idea that there is no innovation in the smartphone space is wrong: the phone will continue to activate many adjacent technologies, like conversational interfaces, augmented reality, and so on. Most of this will be activated by mobile.”

If the company does try to pivot to services revenue, it has a good base to grow from, according to Husson. “If they really want to pivot here, it’s going to be about establishing more trust, and a direct relationship with consumers,” he said.

Perhaps that explains the glee with which Tim Cook has been laying into Mark Zuckerberg over Facebook’s privacy blunders. “Let’s be realistic,” Husson said, in regards to Apple’s tactics. “This is in their own interest, there’s a marketing pitch here. They’re not in the data business, they’re not in the advertising business, and they have used privacy as a competitive advantage.”

As this week’s news has shown, that competitive advantage looks like it could continue for some time.



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