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Apple Facing the Heat for Declining iPhone Sales in Fiscal 2016

- By Sangara Narayanan

Apple reported its fourth quarter earnings on Tuesday, Oct. 25. The numbers disappointed the market so much that the stock dropped from $118.25 by market close on Tuesday to below $114 the following day, wiping out billions of dollars in market capitalization in the process. Apple reported earnings of $1.67 per share which was slightly better than the $1.66 the market was expecting, but the market remained unhappy as a slowdown in iPhone sales pushed the company to report an annual revenue decline in 15 long years.


Since the day iPhone hit the market, way back in 2007, Apple sales have grown tenfold from $24.58 billion in 2007 to $233.71 billion in 2015. Apple's full year 2016 revenues have now dropped to $215.639 billion as Apple's device sales declined year-over-year across the board.

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iPhone unit sales were down by 5% during fourth quarter compared to last year while iPad declined by 6% and Mac by 14%. The trend of lower iPhone sales has continued throughout the year and the big question arises as to whether Apple has already reached its peak sales numbers.

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But to be fair, this is not a trend that is unique to Apple. With smartphone penetration in most of the developed markets already at high levels, sales growth is only going to come from developing countries, where internet penetration and buying power are huge obstacles for high-end smartphones like the iPhone. Gartner, a research firm of repute, has noted that global smartphone sales will continue to slow down in 2016 and will no longer be able to grow in double digits.

"The smartphone market will no longer grow at the levels it has reached over the last seven years," said Roberta Cozza , research director at Gartner. "Smartphone sales recorded their highest growth in 2010, reaching 73 percent."

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Make no mistake: sales are growing, albeit at a much lower pace, and mostly from developing countries. That is not a great place to be if you are a luxury smartphone maker. So there is some validity to the "have iPhone sales peaked" question.

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This is probably why Apple released a cheaper-yet-not-quite-economy-class iPhone SE to cater to developing markets like China and India. But clearly, that growth hasn't been enough to supplement even last year's iPhone sales, let alone allow the company to set record-breaking sales numbers for 2016.

Apple's obvious gains are now coming from its Services segment, which touched $6.325 billion in fourth quarter 2016 compared to $5.086 billion in fourth quarter 2015, a year-over-year growth of 24%.

That growth will continue with the proliferation of services like Apple Pay and Apple Music, both of which have seen fair growth over the past year. Apple Music, for example, was launched in June 2015 and, as of Sept. 7 at the iPhone 7 unveiling, Apple CEO Tim Cook said the service had 17 million users. Apple Pay was even more impressive, showing 400% year-over-year growth as of the third quarter 2016.

As such, the company seems to want to move away from its dependence on device sales, specifically iPhone sales, which, as of this quarter, contributed to more than 60% of overall revenues across devices, services and other products.

With fiscal 2016 done and dusted, Apple stock is still struggling to breach the $114 mark at the time of writing this article. As such, 2017 will possibly one of the most challenging fiscals for Apple since the launch of iPhone.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.