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Can the Apple iPhone 7 launch turn around falling sales?

Apple is holding a product launch event in San Francisco on 7 September at 6pm BST.

The event is causing the usual hype amongst Apple fans, particularly with regard to what shape and features will be included with the new iPhone. There is also rumoured to be a new Apple Watch and MacBook in the offing.

There has not been the customary pop in Apple shares before a new product launch. The usual dynamic is speculators buying up shares before the release of new Apple products, only to sell them on the release when the products fail to live up to the lofty expectations.

The EU’s demand that the company handover €13bn to the Irish government has overshadowed the iPhone 7 launch. Apple CEO Tim Cook called the €13bn “total political crap” and pointed to what many believe to be the real political motivation behind the European Commission’s decision: "I think it’s clear that there is a desire to harmonise tax rates across the EU."

In the fourth quarter of 2015 Apple reported the biggest quarterly profit in history of $18bn, so in the great scheme of things the €13bn ($14.5bn), if it was to pay up, is a splash in the ocean. The biggest threat to Apple from the EU’s attempted tax clawback is to its reputation. The image of a multi-billion dollar tax-dodger won’t help sales.

Apple’s record quarter has proved hard to top. Revenues have been declining year-over-year in the past two quarters because of falling iPhone sales.

Source: Morningstar, 1/9/2016

Can the iPhone 7 turn around Apple’s falling revenues? Probably not. There are no official details on the features so the rumour mill is needed to make a judgement.

The biggest change is reported to be the removal of the headphone jack to provide more space with a lightning-to-audio adapter included instead of headphones. This, if anything, is a downgrade, especially if it means the iPhone cannot be charged at the same time as using headphones. A dual lens camera will be welcomed by selfie-takers and the option of 256gb storage will be a bigger place to keep all the photos. A pressure-sensitive home button will be a technology upgrade without many functional benefits. Apple could also make the iPhone thinner and change the antenna but this is a risk given “bendgate” and “antennagate” following previous upgrades.

Sales will inevitably pickup in the key fourth quarter for retailers, helped by demand from customers holding out for the newest model. The iPhone 7 and 7 Plus will probably not be as drastic of a change as the 6 and 6 Plus, thus there may be a smaller incremental effect on sales.

Apple, like most American tech giants, has serious China problems. Local rivals including Huawei, Xiaomi and Oppo are dominating the smartphone market with cheaper, improved quality models. Chinese companies are increasingly adopting a nationalist marketing message, bolstered by the Snowden revelations of American spying. Local firms have the backing of the Chinese government, and in a communist country, that helps a lot. The government shutdown Apple’s mobile book and film rental services in China. The momentum is against Apple in China, which is why CEO Tim Cook appears to be switching focus to India.

Apple shares are significantly undervalued, trading on a forward P/E of 12 compared to a sector average of near 17 and the 21 for the S&P 500.

Shares of Apple have outperformed global stock markets in the post-Brexit bounce. Apple shares are up 14%, double the 7% gain for the Dow Jones Industrial Average since June 27, the Brexit low (as of September 1, 2016).

The chart below suggests the downtrend that has been in effect for the last year may be coming to an end, as Apple share sit at the top of a $94 to $110 range.

Three-year chart of Apple shares

Source: CMC Markets, 31/8/16

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