Apple Faces Challenge as New iPhones Lose Luster

Global tech titan Apple Inc. (AAPL) became the first U.S. corporation to reach a market value of $1 trillion earlier this year, outperforming the broader market over years thanks to its iconic iPhone model, and more recently, its shift to rely more on its burgeoning software and services businesses. Ahead of Apple's upcoming quarterly report, one team of analysts is signaling a major risk facing the tech giant, pointing to a chart demonstrating waning enthusiasm for each new generation of iPhones, as reported by Business Insider. This could have major revenue and stock price implications for Apple, whose shares are down 7.9% from their 52-week high through Wednesday close. 

Apple's IPhone Has Fueled Its Stock

Stock 10-Year Performance
Apple 1,300%
Nasdaq 313%
S&P 500 174% 

Lack of Innovation, Market Saturation Threatens iPhone Sales

In a recent research note, Citigroup warned that Apple's iPhone launches aren't generating as much buzz as they used to. This is a major issue for the Cupertino, Calif.-based company, which still generates roughly 56% of its revenues from its core smartphone business, according to Statista. While the tech giant has offset a deceleration in the global smartphone market and longer replacement cycles for the iPhone with higher priced, higher margin models, a maturing smartphone market and a slowdown in innovation could eventually take a significant bite out of revenues, profits and returns for investors. 

The researchers pointed to search trends indicating that while there remain significant spikes for web searches after Apple's annual launch events, momentum has been decreasing over time. This data suggests that as the iPhone market matures, customers are less excited about new launches, raising concern over a slowdown in innovation and the saturation of the iPhone in the addressable market, according to Citi. 

"Customers are getting less excited for each new generation of iPhone," Citigroup says. "We suspect this is because of a slowdown in innovation and the saturation of iPhone in the addressable market." 

Citi analysts also noted that that iPhone models have taken longer to sell out over the years, noting that the recent iPhone XR models, launched at 3 A.M. on a Friday, were still available on Friday morning. In the past, customers showed their willingness to wake up early to place their orders for the newest model if they wanted to secure their purchase on the first day. Analysts added that lines outside of Apple's brick-and-mortar locations were significantly smaller for the iPhone XS and iPhone XS Max than they were in previous years. 

What's Next for the Smartphone Giant

Bulls have applauded Apple's growing software and services businesses, including the App Store and Apple Music, viewing the new recurring revenue streams as offsetting headwinds in the traditional core iPhone segment. For example, in a note to clients earlier this week, Bernstein's Toni Sacconaghi made the case for Apple's App Store Ad business to reach $2 billion in revenues by 2020, helping the company meet or exceed its goal of hitting $49 billion in sales for its services business over the same period. 

Apple is slated to report its most recent quarterly earnings results on Nov 1. 

Investors will be looking out for whether or not higher ASPs can offset slowing unit sales, and if the tech giant can continue to diversify away from iPhone sales and post solid gains in its hyped-up services segment. 

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