At the beginning of this year Apple spooked the markets by cutting its sales forecasts for the first time since 2002. The company blamed a significant downturn in its iPhone sales in China, but also weaker sales in its more mature markets.
The downgrade in revenues from $91bn to $84bn, while modest, prompted Apple shares to drop 10% on the day to its lowest level since mid-2017. That turned out to be the low for this year, with the share price rebounding off its 200-week moving average, and has spent the last three months recovering all of those losses and then some, though it still remains well short of the peaks in October of $233.40.
The recovery in the share price seen in the last few months retested a key level last week of $198.50, which is the 61.8% Fibonacci retracement of the entire down move from the record highs last year to the low in January, which makes today’s Apple media event a key marker in terms of where the share price heads to next.
A move back above $200 could well signal further gains back towards the highs with the S&P 500 and Nasdaq also posting strong gains this quarter, after some really sharp declines at the end of last year.
A good proportion of the gains in US markets over the past few years have been driven by the US tech revolution, and that is nowhere better illustrated than in the US Fang+ index which was created back in November 2017, and is an index that tracks the movements of the following US tech stocks: Facebook, Apple, Amazon, Netflix and Google, now known as Alphabet, plus Twitter, Baidu, Nvidia, Tesla and Alibaba. The index has consistently acted as a leading indicator for other US indices in the past few years, and as such has become an important barometer for investors to identify potential turning points in US investor sentiment.
Given that Apple is such a key component of the US Fang+ index, today’s media event is likely to be a key arbiter of how not only Apple performs in the next few weeks, but also the Fang+ index, given that both it and Amazon were until recently trillion-dollar companies, and could well be again.
Titled 'It’s Showtime', Apple launches its star-studded event at 1pm eastern standard time, or 5pm (UK time), though there will be a pre-show before that. The reason this is a big deal for Apple is that we may have reached peak iPhone in terms of sales, particularly given that the average price point is so much higher now and companies like Huawei and Samsung have eaten into its market share.
This means that services will now have to try and pick up the slack and to some extent we have seen that happen. Services revenue has jumped sharply in the last few years, though it won’t be able to get anywhere close to matching the types of margins that we’ve seen in terms of its hardware sales.
Apple Music, Apple Pay, iTunes, the App Store and Apple care are all key growth areas for Apple, and today’s event is expected to mark the launch of a news subscription service, as well as video streaming of films and TV shows. This is an area where Apple has been left behind, with the Apple TV a largely neglected piece of hardware in the last few years. As such, Apple has been left at the starting gate by Amazon and Netflix in the last few years when it comes to streaming content, and if Apple is to hit its services revenue target of $14bn a quarter by 2020, then it will need to monetise its subscriber base much more effectively.
At the moment Amazon and Netflix already have apps that are fully integrated into most new Smart TVs while Sky Q users can access their own subscription from within the Sky Q menu. Amazon already has its own TV Firestick, which also carries the Netflix app, and allows full access to both film databases by way of Alexa.
While Apple does appear to want to go down the content route and already funds some of its own shows, the amount of money it's spending doesn’t appear to match its peers. This is strange given that it has a huge head start when it comes to available cash, in that it generates much more cash from its other businesses compared with Netflix, who are spending billions of dollars in new content every year, and aren’t adding the subscribers at the rate required to match that spend.
In short, while today’s event could mark the beginning of Apple upping the ante in the online streaming sector, it's going to find itself playing catch-up to its peers unless it can partner up with some of the competition, to get a foothold in a market that is becoming ever more competitive with every passing month.
How investors react to today’s star-studded event could determine whether Apple’s shares punch back above $200 and whether the US Fang+ index keeps going higher from its January lows. It could be an ideal opportunity for investors to get their FANGs into a piece of Apple; or it could it be a case of, that's all folks!
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.