With disruptions in the supply chain and a tougher economic backdrop, it is hardly surprising that Apple was not able to clear last year’s high hurdle of sales.
With quarterly sales down by 5.5 per cent – driven by a 7.7 per cent decline in product revenue – the bottom line came under pressure, with net income down by 13.4 per cent.
Although Apple is right to point to problems with the supply chain for disruption to sales – especially for new iPhone models – the more challenging consumer economy also took its toll on the company’s numbers.
The year 2021 was a boom period for electronics as consumers used stimulus payments and money saved from travel and entertainment to upgrade their devices and treat themselves to new gadgets. This was also fueled, as it was in 2020, by increased working from home which boosted the sale of computers and laptops.
These dynamics have now disappeared and have been replaced with a more careful assessment by consumers as to whether they wish to upgrade their electronics. Although Apple’s products remain compelling, the incremental gains in many of the specifications have made it increasingly easy for many to hold off buying the newest kit. And we believe this mindset will persist for as long as the economy remains tight.
In our view, this major innovation drought has been a problem for a while. Apple is exceptionally good at cranking out upgrades in performance and modest improvements in how thin a device is; however, it has seemingly lost the knack of pulling out a big new thing that is designed to wow consumers and entice them to buy. It used to be a firm that created new markets; it is now a firm that plays successfully, but safely, in existing markets.
To be fair, it is hard to do deep innovation each and every year. However, there are new areas like virtual reality, the metaverse, and health technology, where Apple should be making more of an impact. There may well be products in the works, but Apple is somewhat behind the curve with them.
The one bright spot this quarter is Apple’s service revenue which increased by 6.4 per cent over the prior year. Apple has created a stick ecosystem with its various services, and we expect this to show continued growth. However, Apple needs to do a better job of bolstering the profile of some of its services like Apple TV+ and Apple Fitness+ if it is to secure more subscribers.
Overall, Apple is a very solid operator and even in a more difficult economy it is still able to punch out good numbers. But if it wants to go back to producing exceptional results it will need to make some big and bold moves.
