Apple (NASDAQ: AAPL) did not complete the year well. CEO Tim Cook issued a rare letter to shareholders where he slashed the company's fourth-quarter revenue guidance from a range of $ 89 billion to $ 93 billion down to $ 84 billion. There is a $ 7 billion deficit if you had assumed that the company would deliver a number in the middle of its original range.
The lack came because the iPhone sales have been slow in China and in emerging markets. In addition, the company has been damaged by slower adoption for its latest phones – a problem exacerbated by having its latest operating system, iOS 1[ads1]2, enhances the performance of older phones. There are major issues for a company that iPhone sales have accounted for at least 50% of revenue, and sometimes nearly 70% since early 2013.
Where's the iPhone?
Telephone switching used to be related to contracts with the major wireless operators. Customers generally have a heavily subsidized telephone in exchange for a two-year obligation to the carrier. At the end of the two years, most consumers would upgrade their phone as part of the process of signing a new contract.
How it works no longer. The four major carriers AT & T Verizon T-Mobile and Sprint – now charge phones separately, though they all offer installment plans and some offer leases. It has given consumers a better look at how much the phone actually costs, rather than having that number hidden within paying for the service.
It is a change that now has people who are doing their phones longer. Globally, smart phone sales appear to have peaked, with annual transfers falling in the last four quarters, according to data from the IDC, which noted that Apple is not alone in the fight in China.
"China's domestic market continues to be challenged as consumer spending on smartphones has declined," said IDC program director Ryan Reith in a press release. "High penetration levels, mixed with some challenging economic times, have slowed down the world's largest smartphone market."
Reith However, no further decline is inevitable, in fact, he sees that the situation in China is improving.
"In spite of this, we believe this market will begin to recover in 2019 and beyond, driven in the short term by a large, built-up update cycle in all segments, and in the outer years of the prognosis supported by 5G migration, he says.
Is Apple a Buy?
While it's about iPhone sales slowing down because consumers are waiting longer to upgrade, it's not enough to scare me away from Apple. The company has confirmed that it has a problem, but it has already made a big move to do so.
Consumers can upgrade less often, but they will still upgrade. Apple understands it and has priced its latest devices accordingly. The iPhone 6 base model costs $ 649 at launch, while the XS entry level costs $ 999. That's an increase of over a third, and it shows Apple understands its audience.
Yes, the company has to deal with lumpier upgrade cycles when consumers all over the world realize that their existing phones are good enough that they don't I don't need a new one as often. This group will be counterbalanced by the Apple enthusiastic audience who consider owning the new phone to a mark of honor – and one that it appears to be willing to pay for.
Apple revenue may be less predictable quarterly as some consumers change their upgrade habits. It works in two directions. It will be unexpectedly slow quarter as the fourth quarter, but there will also be unexpectedly large growth quarters driven by external factors, which can range from a positive economic outlook to tax refunds to carriers adding 5G to various markets.
The market has changed, and Apple adapts to it. This makes the company a purchase for anyone who takes a long-term view of the company.
Daniel B. Kline owns shares in Apple. Motley Fool owns and recommends Apple shares. Motley Fool has the following options: long January 2020 $ 150 calls on Apple and short January 2020 $ 155 appeals to Apple. Motley Fool recommends T-Mobile US and Verizon Communications. Motley Fool has an information policy.