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Can Apple's [AAPL] share price retain top spot as smartphone competition heats up?

Famously the world’s first company to reach a $1tn market cap, but holding the record has proved difficult.

Apple [AAPL] took the crown as the world’s first $1tn company back in August 2018 after a strong earnings beat and two-day share price surge. The tech giant is now worth $120bn less than its record, after shares plummeted from a high of $233 to just $142 at the start of the year.

It’s clear Apple isn’t quite the force it once was. For the first time in more than a decade, its revenue fell more than 5% year-on-year for the first quarter of fiscal 2019; sales of its main profit engine, the iPhone, faltered by 15%. With a large part of Apple’s profits coming from devices, its decision to withhold unit sales figures in future updates was seen by analysts as an attempt to insulate the company from share fluctuations.

Growth in iPhone sales has been slowing since 2016 as the smartphone market becomes increasingly saturated. Samsung [5930] has now overtaken Apple as the global market leader, with an 18.7% share. The ongoing US China trade negotiations are also taking a toll on the company’s supply chain.

 

Positive signs

However, other areas of its business are still seeing growth. CEO Tim Cook highlighted strong performance of services and wearable devices. Apple’s annual revenue from Macs has grown to more than $25bn. Its Q1 2019 update revealed Mac revenue was up 9% to an all-time high.

 

Market cap$878.55bn
PE ratio (TTM)15.37
EPS (TTM)12.12
Profit margin22.72%

Apple stock vitals, Yahoo finance, as at 15 March 2019

 

It now looks to be tying its future to its iOS empire and wearable devices. Cook told CNBC in January that Apple’s wearables segment, which includes the Apple Watch, has become a bigger business than the iPod at its peak. Revenue from “other products” – which includes wearables like the Apple Watch, as well as Apple TV and HomePod – reached an all-time high of $7.3bn in Q1 2019, up 33% year-on-year.

Looking ahead, the wearables market has a lot of scope for growth and is set to hit $27bn by 2022, according to CCS Insight. With a 45% share of the global smartwatch market, Apple is well positioned, but with rivals like Fitbit [FIT] and new entrants like Conex Watches’ X-One entering the space, it will have to fight to stay ahead.

45%

Apple's share of the global smartwatch market

 

Service sector

Apple is increasingly looking to its services business – the App Store, Apple Music, iCloud subscriptions and others – to buoy revenues. This segment grew by 19% in Q1 to reach $10.9bn. As part of its move to aggregate existing services, it’s set to launch a video streaming service with paid subscriptions and free content, plus a subscription news service in 2019. There are also rumours of a virtual- and augmented-reality headset in 2022.

Judging by Apple’s new ventures such as autonomous vehicles and AI, it seems the main strategy is to diversify. However, whether it can create the same profit rises it enjoyed between 2007 and 2016 remains to be seen.

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