There are product cycles, and then there are supercycles. With the launch of each new iPhone, Apple hopes to trigger a supercycle that will drive its considerable profits even higher.
For Apple these periods of accelerated growth normally come about every two years, sparked by the launch of a new iPhone, such as the iPhone 6.
Tim Cook, the chief executive, is hoping that the iPhone X, its newest smartphone — and at £999 the most expensive it has sold — will help to spark a supercycle that will turn Apple into a $1 trillion company (it is worth just shy of $900 billion).
The world’s largest public company makes about two-thirds of its money from iPhones. As such, analysts expend considerable amounts of energy trying to estimate iPhone sales before Apple reports the official number every quarter.
There are now murmurs among them that the next iPhone supercycle might not be as super as hoped. Jeffrey Kvaal, of Nomura Instinet, broke ranks with most of his peers this week by suggesting that Apple’s gains from the latest supercycle were already priced into its shares. According to Mr Kvaal’s thesis, history shows that Apple’s shares have reached their post-launch peak.
The company is trading at a valuation of 15 times its estimated earnings next year, he said — the same level as at the peak of the iPhone 6 supercycle, and higher than the 13 times at the top of the iPhone 5 supercycle. Apple’s shares fell by 41 per cent from the peak of the iPhone 5 supercycle and by 27 per cent from the peak of the iPhone 6 supercycle, taking about 20 months to recover in each case, he said.
He acknowledged that Apple had developed its other businesses, saying “we believe Apple’s improvements merit a richer multiple than in prior years, though marginally so”. But he added: “We do not consider any of these sufficient . . . to flout the historical precedent.” He downgraded Apple to “neutral” from “buy” and dropped his price target from $185 to $175. Apple shares closed at $175.01 yesterday, up by 0.4 per cent on the day.
The last time an analyst downgraded Apple was in June and the company’s share price has since climbed by about 14 per cent. So it takes a brave one to step away from the herd. Apple is rated as a buy by 36 analysts, eight are neutral and none recommend selling.
Mr Cook roundly dismissed early reports about sluggish demand for this year’s iPhones and the business will report on sales of its new handsets in February. But shares in Hon Hai Precision Industry, the Taiwanese owner of the iPhone assembler Foxconn, which makes about half its money from Apple, have fallen by 17 per cent over the past three months amid reports of weak demand.
Analysts at Cowen suggested last week that customers were shunning the iPhone X for cheaper models, because they thought its technological advances were not sufficient to justify the price. Sales estimates for the last three months of the year vary, with Cowen forecasting 79 million sales and IHS Markit expecting Apple to break its fourth-quarter record with 89 million.
Recent news from Washington has proved to be both good and bad for Apple. President Trump’s tax cuts will put considerably more money into consumers’ pockets, which they may want to spend on a new smartphone. But big multinationals such as Apple will pay more than thought to repatriate existing profits from overseas tax havens. This is a blow to Apple, which had about $252 billion abroad, more than any other public company in the world.
Advice Hold
Why There is enough concern about sales of the latest iPhones to warrant caution after a year in which the share price has already risen by half
Housebuilders
Housebuilders’ shares were clobbered yesterday after the government pledged to ban ground rents on new properties. In the grand scheme of things, though, the move marks an incursion into a relatively small part of the housebuilding market.
For some of the leading housebuilders ground rents were a lucrative but obscure source of revenue. As Taylor Wimpey’s £130 million provision in April for leasehold complaints showed, the amounts in question are not insignificant but neither are they material.
McCarthy & Stone, though, is front and centre of the changes thanks to its specialism in retirement home, where ground rents are more common. This was reflected in yesterday’s share price movements. While none of the blue chip housebuilders — Taylor Wimpey, Persimmon, Barratt Developments, Berkeley — fell more than 2 per cent, McCarthy & Stone lost a tenth of its market value.
Its properties rely to an extent on a system that allows it to collect ground rents from residents to pay for communal facilities and services. The builder points out that these costs are far from extreme, with the average on its portfolio being 0.12 per cent of the selling price, and a ban will mean a roughly £30 million hit to the company’s bottom line.
Of course, McCarthy & Stone does not intend to take this lying down. It will argue for an exemption and if that does not work it will do what all businesses do when they are hit by a new cost and pass it on to the consumer and suppliers.
In the case of a retirement home builder this could translate into attempts to renegotiate land purchases. However, in the development market it is not alone and there are concerns about whether it will simply miss out on good sites because it is no longer able to offer top whack.
While the episode is clearly not a good one for the residential home building sector, it does not appear to have the hallmarks yet of something as serious as the banking industry’s PPI scandal in terms of its financial impact.
Advice Buy
Why With the exception of retirement builders, the leasehold issue is not a major financial headache
