On November 1, we learned Apple’s fourth-quarter results. Its earnings per share were equal to $2.91, and its revenue was equal to $62.9 billion.
These numbers tell us that earnings per share were up by 41 percent and revenue was up by 20 percent, but the consensus forecast was lower than that.
Throughout the earnings season, it seems that the markets were more interested in where a company is going rather than where it has been. That is the reason that Apple’s stock decreased by nearly 6.5 percent directly after its earnings announcement. It looks as if it is true that people expect more from those who are given a lot. This may be an indication that high expectations for Apple need to be lowered.
Apple makes more money than any other company in the world, and the iPhone is personally responsible for that. What doesn’t seem to make sense is the fact that the iPhone’s share of the national markets is so low. Sales of iPhones equal less than 20 percent of the global smartphone market.
How is it possible that Apple gains a majority of the market’s profits with such a tiny market share?
Ted Bauman says that the answer is because Apple has pricing power.
For example, a consumer who purchases an iPhone is buying more than just a smartphone. This particular person is buying a product made by Apple. Because it is an Apple product, this particular customer is willing to pay a higher price for it although the iPhone’s capabilities are not any better than those of its competitors.
The fact that Apple can charge more money for its products means that it has pricing power. People are purchasing the product because of the brand and not because its products offer the customer significant features that the others cannot provide.
The Apple brand is more valuable than any other brand in this world. Forbes has stated that the monetary value of that brand is equal to $182.8 billion. In addition to that, the magazine says that the company’s pricing power is what gives Apple approximately 60 percent of its profits.
It takes a lot of work to build brand value, so the extra money Apple has received in revenue has definitely been earned, but it’s as close to earning money for nothing as it can get.
Right now, Apple appears to be losing some of the wind beneath its wings.
Ted Bauman knows so much about this subject because he has spent the last several years as an economist. When his father decided to retire from his job as a financial writer, he asked his son if he would like to take over for him, and he agreed. Since that time, Ted moved from writing about asset protection to writing about investments. Rather than trade based on his emotions, he uses algorithms and is a rules-based investor. His background with rules-based investing caused him to create two rules-based investment services that he calls the “Smart Money System” and “Alpha Stock Alert.”
Technology companies today are spending more time on cultivating and taking advantage of their brands than improving and creating better products. Some examples are Google, Amazon, Microsoft and Facebook that have a large number of customers who prefer to purchase their products because they have those particular names on them, and these companies are earning a large portion of their profits from this reality.
Even though this is the case for other tech companies, it doesn’t seem to be what is happening with Apple this year. Other companies grew by double digits, but Apple only grew by 8 percent. This is not good news for Apple. Apple is only profitable because its products are much more expensive than those of other companies.
Apple’s brand premium will begin to decline, and when it does, its pricing power will go with it. Its bottom line will suffer when that day comes, and it might have already passed.
Apple’s stock decreased by a significant amount on November 1, and analysts stated that the reason was the company’s guidance for the 2019 fiscal first-quarter revenue. The guidance stated that Apple would earn between $89 billion and $93 billion during the holiday shopping season. Analysts thought that it would earn $93.02 billion.
Apple’s unit sales were below the expected amount. In 2018’s final fiscal quarter, Apple sold 46.9 million iPhones. This number is exactly the same as last year’s. It was also less than what the analysts expected.
At that time, the average iPhone user spent $793 on his iPhone when analysts believed that each customer would spend $729. This is a significant increase.
Apple also launched new versions of some of its products, and these were the iPad Pro, Mac mini and the MacBook Air. The new versions of these products are considerably more expensive than the older versions, but the new versions are not offering users anything particularly new.
People are doubting that Apple’s stock is going to continue to rise. The stock has decreased by 18 percent since October because iPhone sales are not going to continue to thrive as they have been. According to Goldman Sachs, the demand for new iPhones is losing steam, and it has lowered its forecasts for 2019 sales along with the earnings and the revenue. It also lowered its price target for Apple stock.
The conclusion is clear. Unit sales for Apple are starting to slow down, but it earns its profits on the fact that people will pay more money for its products. In addition to that, Apple is losing pricing power quickly, and its competitors are gaining this power. It’s only a matter of time before Apple’s revenues begin to fall as well.
Ted Bauman says that Apple knows that it is in trouble. This is the reason that it will stop releasing unit sales as of now. The market is operating as if this means that Apple is expecting its unit sales to decrease.
Ted Bauman says that the problem doesn’t lie with Apple alone. He has been telling his followers that an economy that depends on pricing power for wealth creation is on shaky ground. Stock valuations that are dependent on brand values have the potential to fall as far and as quickly as they increased.
The benefits of brand valuation belong to those who own the capital and not to those who are working, so our pricing power-based economy is the reason that inequality is growing, and we can see the signs of this fact all around us.
These are the reasons that Ted Bauman believes that investors need to pay close attention to Apple.