Apple Faces Big Challenges in 2016, Despite Fourth-Quarter Success
Apple's (AAPL) - Get Report fourth-quarter, operating results were strong, but the numbers didn't presage a great 2016. What's in store for the largest company in the world?
In the fourth quarter, against revenue predictions of $51.1 billion, Apple scored $51.5 billion, up 22.3% from a year ago. With an eye on holiday sales of the blockbuster iPhone 6s and 6s Plus, Apple's management insists that there's more good news to come. The iPhone stable makes the biggest contribution to Apple's revenue pie.
CEO Tim Cook believes the iPhone will register record sales over the next few weeks. However, many critics aren't keen on the latest upgrades. They say the newer S models aren't a huge improvement from their 6 and 6 Plus ancestors. It remains to be seen if consumers will flock to them or stay away.
Will 2016 be a great year, or a struggle again with new challenges and obstacles? Let's take a look.
The Component Dip
A report by Credit Suisse earlier this month said that the tech giant had reduced its orders with suppliers by 10%. That information pushed the stock down 5%.
The news is likely to impact Apple's vast supply chain, which includes such well-known producers of components as Skyworks Solutions, Qorvo, Avago Technologiesand Dialog Semiconductor. While Skyworks and Qorvo delivered healthy quarterly results, Qorvo announced a disappointing revenue guidance for the third quarter.
Past performance and guidance by its suppliers have always helped gauge Apple's performance.
Also, Dialog earns about 70% of its revenues through business with Apple. The supplier of power management chips not only reported weak sequential growth over the last quarter but also lowered revenue growth expectations to 6% for the fourth quarter.
The Currency Flux
Apple derives 65% of its revenues from overseas markets such as China, Europe, and India compared to 55% for rival Microsoft. As a result, Apple must manage significant currency risks. This has been highlighted in recent months as the Yen has struggled and the U.S. dollar strengthened. As currency exchanges generally affect revenues by five percentage points, Apple will probably record slightly lower sales from a year ago.
The Very Big iPad Pro Bet
Across the second quarter of 2015, iPad sales plummeted by 19%, with revenues taking a 23% hit. Apple, although modest with its sales estimates at the onset, is hoping for the launch of the iPad Pro to arrest this trend as it combines PC power with a mobile OS. However, the high price places this iPad against advanced laptops, making even Microsoft's Surface Pro 4 look like a better option. Furthermore, with larger iPhones expected to dampen iPad sales, things don't look too healthy for this segment.
The Flickering Innovation Candle
Apple has been synonymous with innovation since the launch of its first generation products. However, the company is facing stiff competition from peers such as Samsung (SSNLF) in the smart phone market, which offers options in almost every price point with similar hardware and features).
To counter this, Apple is keen to break ground in the software space with Apple Music and Apple Pay. While Apple Pay seems to be a fast-riser, its impact is a work in progress. It remains to be seen if the company can smoothly integrate both offerings into its product mix.
Apple clearly faces big challenges in 2016.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.