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As iPhone Sales Drop, What's Next for Apple (AAPL)?

Maher Syed

Yesterday, Apple AAPL announced its earnings results from the second quarter of fiscal 2016.  The report was very disappointing, as Apple recorded its first quarterly sales decline in 13 years.  The tech giant saw its iPhone sales drop by 18% compared to the same quarter last year.  Investors expressed their disappointment in the market, sending Apple’s shares down by as much as 8% after its earnings were released.  Apple’s growth story seems to have hit a speed bump, so what lies over Apple’s horizon now?

Growth Slowdown

Apple’s earnings release indicated that the company will have to overcome some growth obstacles that lie ahead.  The iPhone’s sales lag had company, as the iPad and Mac saw sales shrink by 19% and 9%, respectively.  Global smartphone demand has been seeing weakness in recent times.  Regardless, Apple may have to revamp its products or create a new growth driver to prop up its revenues in the future.  The iPhone doesn’t have a clear sidekick right now, and the smartphone’s sales accounted for 65% of Apple’s Q2 revenues.  The iPhone SE and Apple Watch are young, so only time will tell as to whether or not these products can drive a lot of growth for Apple.  

Geographic segments have lagged compared to the same quarter last year.  Apple generated 62% of its revenues outside of the Americas, so international expansion is critical for Apple’s future growth.  China was supposed to be the next growth frontier for the Cupertino tech giant.  Having an iPhone is a status symbol in the country, so it is really disturbing to see that revenues in the greater China region fell 26% for the quarter on a year-over-year basis.

Guidance wasn’t creating a very optimistic picture for Apple either.  Q3 guidance calls for revenues ending up between $41-$43 billion, which is well below broader expectations of about $47.25 billion.  Global markets have been volatile this year, so one can only hope that this is why guidance has fallen short of general expectations.

Apple Services

One bright spot from Apple’s earnings release was the immense growth seen in its services segment.  This section includes revenues from the App Store, Apple Music, iCloud, Apple Pay, and other services.  The segment generated $6 billion in sales, which represents a 20% increase from the same quarter last year.  The revenues from Apple Services surpassed iPad and Mac sales, making it the company’s most lucrative segment behind the iPhone.

Apple Music has seen considerable growth, and it now has 13 million paying subscribers.  Apple Pay is also booming, and Tim Cook said that the service is adding 1 million new users each week.  However, Apple Pay has not been very effective profit-wise just yet. 

Apple Car

According to a German finance publication known as Handelsblatt, Apple was in talks with both BMW BAMXF and Daimler DDAIF to develop a vehicle.  The paper also states that those talks have fallen through.  Apparently, the parties couldn’t agree on who would have control of the customer data collected by the car.  There is also speculation that there were disagreements over who would lead the project.

Ford Motors’ F CEO Mark Fields believes that Apple is building a car.  He is not alone, as evidence has been mounting, suggesting that Apple is working on creating an electric vehicle.  Apple has hired over 70 Tesla TSLA employees, and it recently hired Chris Porrit, who was the VP of vehicle engineering at Tesla.  Rumors have it that Apple’s car will be released sometime close to 2019 or 2020, but nothing has been set in stone or acknowledged by the company itself.

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