Will the new iPhone change the face of Apple? - August 21, 2016

Will the new iPhone change the face of Apple?

The announcement of the new iPhone (and the usual “One more thing”) is just days away – but how will the market react to the new Apple products? Investors are anxious to see what the company has to offer but it’s worth mentioning that lately Apple’s announcements are less about new, ground-breaking technologies and more about refinements. This also defines the expectations of investors since the time of former innovation (and huge spending on R&D) at Apple is now gone.

To be fair, the changes aren’t only about Apple: smartphone market is slowing globally. What’s more, Chinese manufacturers can produce the same (or sometimes better) quality devices as Apple for less money. If that wasn’t enough, South-Korean Samsung fights in the premium range tougher every year and already took over the role of main innovator in the industry as important tech journals mention that more and more often.

All these already lead Apple to lose 33% of its incomes in China. (Innovative Securities already wrote about the difficulties they have in China.) They had an answer to that, the rather successful iPhone SE which is cheaper and could be sold to more people. The problem is: the SE is sold with less profit per device therefore it’s weakening one of the main strengths of Apple, the unbelievably high profit margins. (According to Investors.com “The gross profit margin of the iPhone SE is probably about 30% to 35%, compared with about 45% for the iPhone 6 and 6S”.)

This is very important to Apple: iPhone sales are the company’s main profit driver as two-thirds of their incomes are from phones. What’s more, in the last quarters the sales shrank again so they have to face falling incomes and that will probably bring falling profits as well.

In a situation like this it’s even more interesting to see how the market will react to the new iPhone and how many units will they be able to sell. Generally speaking, after the announcement of a new model, stocks performed well for half a year. However, last fall this was not true for the iPhone 6S.

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Apple’s stock price and the launches of the new iPhones since 2007
These changes already show the aforementioned problem of Apple: they aren’t considered the main innovator of the industry, so the market sees smaller growth in them. This leads investors to see Apple “only” as a stable payer of dividends and for a good reason: the company still creates high profits from quarter to quarter. What’s more, they already have $162 billion cash in the company, which they don’t really spend on anything else than buying their own shares.

What would change the investors view on Apple? A really big announcement they haven’t have in years, like entering the car industry. But for now, the “One more thing” will probably be the new generation of Apple Watch and as far as we know from insiders, it will only be a refinement of the old Watch.