If you hold shares of Apple (AAPL, Financial), you might be thrilled as the company reported record quarterly earnings recently. Share prices indeed have gone up after this announcement and there is a widespread positive feeling about the company. While it may all look rosy from the face of it, you, as an investor, must try to analyse deeper into this and interrogate if this excellent growth will continue for 2015 as well. As the saying goes, “Great Homer sometimes nods”, which means that even the greatest person on earth is susceptible to flaws. The same applies to Apple as well. However strong and comfortable the company looks right now, shareholders should be aware of the following points and play it safe when it comes to expectations from the company in 2015.
iPhone – The sole sales driver
Currently, Apple is heavily or rather solely dependent on the sales of its iPhones for its revenues. This was evident from the figures that were recently declared by Apple for this quarter. iPhones contributed to around 61% of the revenues for this quarter as compared to 56% for Q1 2014. It does explain the dominance of iPhone over other devices of Apple like iPad, Macs, iPods etc.; however it is not good for any company to solely depend on a single product for its earnings. If there is a sudden drop in demand for the iPhones during this year, it could lead to drop in earnings for Apple. The following chart shows how much iPhones contributed to the device wise sales of Apple over the years.
The fact that Apple does not have any other strong source of income to fall back upon could spell trouble for the company at a time when customers stop getting overwhelmed about the iPhone versions. The case of Samsung (SSNLF, Financial) is a classic example to mention here. It was once the market leader in the smartphone industry with its impressive Galaxy series of phones. However, it lost its place to the iPhone when the latter was launched in the market. Though it lost its monopoly in the smartphone market, the company did not suffer great losses, because it had a diversified nature of business that included memory cards, televisions and home appliances, semiconductors and the like. Apple could benefit hugely if it follows the same philosophy.
Tough challenges ahead in Chinese market
China has always been a big market for Apple. Currently, it ranks only behind the US in terms of iPhone demand. With increasing demand from this market, Apple will have to work its way to stay in China as the Chinese government is quite strict with foreign companies. It is quite natural that any company would give preference to its home-manufactured brands. China is one of the fiercest believers of this policy and will try to subdue Apple’s dominance in the smartphone industry, thereby allowing its home brand of Xiaomi to take control. It is now time for Apple to actively work on a strategy where it can mitigate the risks posed by the Chinese government and establish its supremacy there as well.
Fall of the iPad
While there was a huge response about the extraordinary results of Apple during Q1 2015, there was one point that spelled slight trouble. It was the news about the drop in iPad sales by 18% from last year. iPads have been one of the iconic products from Apple and decline in demand for these have indeed raised eyebrows of many investors. Though they were second only to the iPhones, iPads were always the darling of the tablets industry. Apart from the number of units coming down by 18% in Q4 2014 when compared to Q4 2013, the rate at which these units were sold were also cheaper than last year, bringing a decline in iPads revenue by around 22%. The following gives a comparison of the tablets sold by different companies in the fourth quarter of 2014 and 2013 and for their respective full years.
Conclusion
Though Apple is currently the market leader in the technology sector, the above mentioned factors could pose slight threats to the company’s performance for this year. Shareholders should be aware of the same and should hold a diverse portfolio than depending solely on Apple for their returns. Apple will bring good returns this year as well; however their magnitude might be quite lower than Q1 2015.
