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Introduction
Wednesday was a big event for Apple (NASDAQ:AAPL), packed with eight new products and the market loved it, until it didn’t. Apple stock was flat going into the event but rallied after the announcement of the new iPhones. Apple has been on a steady decline since its August highs and with some overnight digestion of the event, perhaps investors were underwhelmed as the stock fell 1% on Thursday while the major indices marched higher.
Apple is viewed by investors as a safe haven to protect against inflation, the Fed, and a likely recession on the horizon. It is certainly a solid pick over many investments, including the large number of “zombie” companies and other high-valuation companies on the market. However, Apple still has all the ingredients for a short-term, significant downtrend.
8 New Products
Many are aware of at least some of the new products announced, but for the convenience of those who haven’t seen it all, here’s a brief summary of each new product that was announced. There were no changes in pricing, however, the unpopular, entry-level iPhone Mini series ($699) was dropped and the Apple Watch Ultra is a new product with a premium price tag. Overall, Apple announced the following:
- Apple Watch Series 8 ($399)
- Apple Watch Ultra ($799)
- Apple Watch SE ($249)
- Second Generation AirPods Pro ($249)
- iPhone 14 ($799)
- iPhone 14 Plus ($899), replacing iPhone 13 Mini
- iPhone 14 Pro
- iPhone 14 Pro Max
Apple Watch Series 8
The Apple Watch Series 8 carries over the prior design, but with a brighter display and adds a number of new health and safety features. A dual-temperature system helps deliver accurate temperature sensing of up to 0.1C to improve information on sleep, illness, workout, and women’s health. Series 8 also includes improved workout data and vehicle crash detection.
Apple Watch Ultra
A new premium product optimized for serious outdoor and fitness enthusiasts, the Ultra will cater to a niche market of individuals who look beyond basic smartwatches to those offered by companies like Garmin, which provide an enhanced fitness experience. Apple Watch Ultra utilizes a larger, rugged design that better protects the display and provides water resistance up to 40M, with plans for a diving app. The Ultra also gets a big battery life jump to help track data from long races and can be extended up to 60 hours with a new low-power setting. Finally, an enhanced L5 GPS system helps provide more-accurate tracking when your view may be obstructed by trees or buildings.
Apple Watch SE (2022)
The Apple Watch SE is now the entry-level device, as the Apple Watch Series 3 is now officially discontinued. The new watch made just a brief appearance during the event, but the existing Apple Watch SE is now upgraded with the same processor as the Series 8. While it gets crash detection as a new feature, it remains similar to its predecessor.
AirPods Pro Series 2
Don’t fix what’s not broken. AirPods Pro 2 receives a better driver for improved sound and new chip to deliver improvements to noise-canceling and the existing Transparency Mode. You can now swipe the stem to adjust volume, charge the case via an Apple Watch charger, and better find it when misplaced thanks to a built-in speaker.
iPhone 14 & 14 Plus
Apple goes big and ditches the Mini for the iPhone 14 Plus, which becomes the first time Apple offers customers the choice of the biggest iPhone display without the biggest price. Unlike prior models, iPhone 14 will use a last-generation processor (also found in the $429 iPhone SE) but with a little more oomph thanks to an additional GPU core. Whether or not this decision comes in light of the chip shortage or to help upsell the iPhone 14 Pro is up for debate. iPhone 14 comes with improved cameras and battery life as you would expect, and now the iPhone 14 Plus is the new battery king. On the communication front, emergency satellite communication is possible for those who need help when there’s no service.
iPhone 14 Pro & Pro Max
The notch, which was first introduced in 2018 and since become slightly smaller is now replaced by a “dynamic island”, or a pill-shaped cutout that comes in the new, always-on display that can be twice as bright as iPhone 13 Pro. Apple cleverly designed the UI to embrace the cutout to make it less noticeable. iPhone 14 Pro exclusively gets the new A16 chip built on a 4nm process that will help apply advanced software techniques to photos. All cameras are new, improved and exclusive to the Pro. The main camera gets a 65% bump in sensor size and for the first time is bumped above 12 megapixels to 48. This means it can capture high-resolution 48MP photos or as it will in most cases, standard 12MP photos by combining the light information from four pixels into one, also known as pixel binning. The 48MP sensor allows for a cropped field of view and brings back the 2X camera for those who find the 3X camera to be too tight.
Unexpected: No Price Hikes in the US and China
It was expected by many, including top Apple analysts that the new iPhones would cost more. I suspected a $29 increase in line with the recent iPhone SE price increase, while CNBC published a prediction suggesting a $100 increase as many expected. However, all new product pricing remained the same, at least in the US and China. One exception is that the unpopular, entry-level Mini series iPhone being discontinued does raise the entry-level price point by $100.
Apple chose to bite some rising costs, protect the brand and put its consumers in front of its investors. For the long run, Apple makes the right decision, especially with the shift in high-margin Services. However, investors may find themselves concerned with lower-margin iPhones, which still make up the bulk of Apple’s revenue and profits. Apple may have the economic prowess to avoid significant, unforeseen cost increases but that doesn’t mean it’s immune, and the strong dollar only makes matters worse. In fact, outside of the US the iPhone did receive price increases. China was excluded, but not key markets like Germany ($100 increase), UK ($80 increase), Japan ($146 increase), and Australia ($33 increase).
iPhone Pro Max Cannibalization
The new iPhone 14 Plus brings uncertainty to the product mix, and likely a negative hit to overall margins. According to Statista, the biggest iPhone, the 13 Pro Max model, makes up 30.8% of iPhone 13 sales. I believe this device gains its popularity thanks to its larger display over its “Pro” features. However, shoppers can now purchase an iPhone with the largest display without splurging for the most expensive Pro model. There’s no doubt that the iPhone 14 Plus will cannibalize sales of the iPhone 14 Pro Max. Fortunately, it will be an upsell opportunity for iPhone 14 shoppers, but so far it looks like two steps back, one step forward. Only time will tell how the product mix plays out.
The Fed Isn’t Pivoting
Arguably the most important factor for Apple and all stocks, in general, is the macro environment and how the Fed decides to tread the murky waters ahead. Last month, the inflation data released for July was better than feared, but still a staggering 8.5%. This was the first downtrend from the peak in June, which came in at 9.1%.
For some reason, the market anticipated that the Fed did its job and that it could change course. Two weeks ago, Fed chair Jerome Powell made an 8-minute speech that tanked the market; he did not change course. After all, he wants 2% inflation, not 8.5%. On Thursday, he again confirmed that he will “keep at it until the job is done”. Following his remarks, CME Group’s Fed Watch tool indicates an 86% chance that the Fed will, for the third time, raise rates 75 bps. A month ago, the chance was just 68%. Here we are in with two negative quarters of GDP growth, and we haven’t even seen the effects of the first 75 bp hike.
That’s a lot of uncertainty, and unfortunately, Apple doesn’t have the wiggle room to be the safety net many investors might be hoping for. Last quarter, Apple’s revenue growth slowed to just 1%, yet it maintains a price-to-earnings ratio of 25, which is above the Dow, the S&P 500, and the NASDAQ. That’s effectively a 4% earnings yield on a stock, which is just above where the Fed wants to be by the end of the year. That’s a lot of risk for a new investor to pay.
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