Can Apple rebound from an uneven 2018 in which its shares dropped 7%, or are there more choppy waters ahead?
Since reaching a high of $233.47 on Oct. 3, a mix of trade fears, weak iPhone reports, legal troubles and more have dragged down the once high-flying stock, though it has jumped 7% since Christmas. For 2019, more challenges -- as well as potential opportunities -- lie ahead. Here are a few of the biggest issues facing Apple in the coming year.
1. Navigating Trade Uncertainty
Tariffs are a potential thorn in Apple's (AAPL - Get Report) side, and that might continue into the new year. Uncertainty around U.S.-China trade policy -- and Trump's comments that he could impose tariffs on iPhones -- haven't been kind to Apple's stock. In a recent note, Wedbush's Dan Ives suggested that the best possible scenario would be for the trade conflict to wind down in early 2019, with no disruption to Apple's flagship Foxconn factory.
But Apple is already making plans to shift some of its production out of China, according to a recent report. And heading into 2019, DA Davidson's Tom Forte believes that Apple is in a strong position to mitigate tariff risks: "Part of this belief was based on the company's size and ability to both negotiate pricing and terms with its manufacturers and move its manufacturing out of China," Forte explained.
2. Battles With Qualcomm
Apple's been locked in a lengthy, and nasty, legal spat with Qualcomm (QCOM - Get Report) that originated over over licensing rates and patent fees, with Apple suing Qualcomm in three countries, including a $1 billion lawsuit in the U.S., and Qualcomm filing countersuits of its own claiming Apple stole trade secrets to give to Intel (INTC - Get Report) . Given the prospect of a damaging fight or adverse judgments, investors are taking notice -- and keeping their fingers crossed for a swift resolution.
Wedbush's Ives said a settlement would "remove worries around this growing legal headwind." However, a quick settlement doesn't appear likely as of now -- in November, Reuters reported that there were no settlement talks taking place, and in December, a San Diego judge set a trial date of April 15, 2019.
3. Meeting iPhone Unit Sales Predictions
Ives suggested that unit sales of 200 million for full-year 2019 represent a "line in the sand for the bulls/bears." Apple is shifting away from a focus on iPhone unit sales, but they still have the potential to disappoint analysts. CFRA Research's Angelo Zino wrote in a recent note that iPhone units could underdeliver next year, and that "consensus expectations remain too elevated." Those estimates could shift lower in the early part of 2019, Zino wrote, meaning that Apple shares "will likely start off the year on shaky ground," though he expects the stock to outperform the broader indices throughout 2019.
4. Selling Investors on the Services Story
In its last earnings report, Apple said that they would no longer report iPhone unit sales because they're simply no longer relevant. Many analysts agree, but it could take time for investors at large to adjust to the new reporting regime. Evidence of slower iPhone demand has been seized upon by many observers, and it will take more work for Apple to persuade investors that services -- not unit sales -- are indeed the future.
Needham's Laura Martin is bullish on the idea that Apple should be valued not by unit sales, but by modeling the average lifetime value per user: "We believe the best way to value Apple is as an ecosystem with de facto members or 'subscribers' because our research indicates is an average iOS consumer stays within the Apple ecosystem for over ten years," she said. For 2019, Needham forecasts services revenue of $11 billion, making it Apple's fastest-growing division (30% year- over-year) and second-largest overall behind the $61.3 billion in iPhone sales. Nonetheless, it may take some time for the iPhone giant to sell investors on the services narrative.
5. Planning for the Arrival of 5G
In 2019, the entry of 5G into the market could shake up the competitive landscape for smartphones, CFRA's Zino pointed out. "We expect both Samsung (SSNLF) and Huawei to unveil 5G-enabled devices in the calendar year 2019, which may be perceived as a negative from a competitive standpoint," he said, projecting a "no-growth environment" for Apple in 5G in 2019 and into early 2020.
But there is still room for optimism, even if Apple is slightly late to the 5G party. The majority of the U.S. population won't have access to 5G until 2020, Zino noted. Apple could release a suite of 5G phones in late 2020, and investors may start factoring in the benefits of 5G for Apple by the end of next year.
6. The Decline of the Smartphone
As smartphones have become the center of the universe for consumers, Apple investors have reaped great rewards. Taking a longer view, however, smartphones may not always play such a dominant role in the lives of consumers, said Forte. "Today, the smartphone, for the most part, remains the primary means that consumers interact with the Internet," he noted. "We see the potential for a future where the smartphone plays a diminished role as consumers increasingly interact with connected devices without the influence of their smartphone," such as Amazon's (AMZN - Get Report) Alexa or Alphabet's (GOOGL - Get Report) Google Home and Google Assistant.
Apple's Siri and Apple HomePod products have lagged behind, but over time, a future less dependent on phones could weaken Apple's operating performance, according to Forte.