There seems to be a prevalent feeling that something is amiss at Apple Inc. (NASDAQ:AAPL). The stock price has fallen almost 40 percent since its September high of $700, recent product introductions have represented only marginal improvements on existing models, and competition from companies like Samsung is heating up. Many are pointing to the passing of innovation powerhouse Steve Jobs as the main reason for the company’s struggles.


Apple Inc. (NASDAQ:AAPL)’s sales of older, less expensive iPhones climbed in its latest quarter, highlighting the challenges facing the world’s most valuable technology company as it tries to reverse a recent decline in its earnings and prove that it can still innovate.

Apple product refreshes generally hurt gross margins

Product refreshes generally hurt gross margins, as Apple Inc. (NASDAQ:AAPL) in the past has been able to squeeze out higher gross margins the further away it gets from releasing a product. Last year, the company refreshed nearly its entire product lineup in September and October, hurting margins. This year, the company appears to be on the same path, having only unveiled new MacBook Airs at its developer conference last month.

Troubling trends developing in Apple

In a research note published on Wednesday evening, Sector & Sovereign Research analyst Artur Pylak noted that while there were some positive signs in Apple Inc. (NASDAQ:AAPL)’s report, there are also a number of troubling trends developing. A few key points quoted from Pylak’s note:

  •  iPhone units were 19% above projections, but ASPs were down 5.2% QoQ. iPad units were 16% light vs. expectations and last year, clear share loss in a fast growing market.
  • This is 3 straight quarters of sales deceleration and 5 quarters of falling margins. Margins dropped despite the positive mix shift toward iPhones. International sales were off hard.
  • 2014 consensus expects 12% sales growth and a recovery to 37.5% gross margins. Given the current trajectory and tough competition, Apple Inc. (NASDAQ:AAPL) needs an easier target.

Apple business model is beginning to come apart

“There are ample signs that the business model is beginning to come apart,” Pylak wrote. ”This was the fifth consecutive quarter of declining gross margins, with guidance on the table suggesting further declines in the September quarter. Indeed, the mix shift toward the higher margin iPhones and away from the lower margin iPads ought to have resulted in good margin news for 3QFY13. Sales were flat vs. the year ago quarter, a level considered disappointing even then, and decelerated for 7th quarter in the last 8.”

He continued, “4QFY13 guidance offers little hope for a break in the trends – the mid-point of guidance would have another 40bp sequential drop in gross margins and sales down 1.3% YoY. With vigorous competition in its core markets, and signs that the high-end smartphone market is slowing, business as usual for Apple Inc. (NASDAQ:AAPL) may not be good enough to meet consensus projections that expect the company to return to double digit growth and reverse margin declines.”

Conclusion: Overall the quarter was anything but good for Apple

“Taken in full context, the quarter was anything but good for Apple Inc. (NASDAQ:AAPL),” the analyst concluded. “The decline in iPad sales within the high growth tablet market is sobering and reminiscent to Apple Inc. (NASDAQ:AAPL)’s early pitfalls with Mac against the PC that ushered in the Wintel era. Apple Inc. (NASDAQ:AAPL)’s pace of innovation has slowed with no major product announcements since last October, and none expected until the fall. Apple Inc. (NASDAQ:AAPL) may have lost the interest of consumers. Execution in markets outside the US has been difficult with the existing business model and sales haven’t just slowed, they’ve declined in YoY and sequential terms. As a result we believe 2014 consensus estimates continue to be unrealistic given the company’s trajectory of decelerating sales and declining margins. A future of downward revisions and quarterly misses does not bode well for Apple investors.”