On Jan. 9, 2007, Apple introduced what would become the tech stock's biggest catalyst ever: the iPhone. This is Apple's "gateway" product, having introduced legions of customers to the company's "sticky" ecosystem over nearly eight years. It is also the company's most profitable product.
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Today, the iPhone is absolutely fundamental to Apple's business. But there is a flip side to this success story: Is it possible that Apple has become so dependent on the phone that it could become a big risk?
Image source: Apple.
What happens when the growth stops?
iPhone sales in Apple's fourth quarter of fiscal 2014 provided 56% of company revenue, making the segment impossible to ignore and absolutely crucial to results. But imagine this: iPhone sales at a whopping 75% of revenue. Believe it or not, this is a possibility for Apple's first quarter.
How would this high percentage of sales from Apple's iPhone business be possible? The figure is possible by using longtime Apple analyst Ming-Chi Kuo's bullish estimate for 71.5 million iPhone sales in the first quarter,up about 40% from the year-ago figure. It also assumes the iPhone line maintains its average selling price from the year-ago quarter and the average growth of Apple's other businesses -- iPads, Macs, iPods, etc. -- is in the single digits.
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Sure, this sort of performance in would not be a bad thing. In fact, it would be outstanding. But it would also set the stage for tough comparisons in 2016.
Theoretically, the more iPhones Apple sells on an annual basis, the higher the probability of a year-over-year decline in the subsequent years. The iPhone 6 lineup, with its larger displays, was an exception to the rule. It was clear ahead of time there was pent-up demand for an iPhone with a larger display, and analysts have been very bullish on the device. Based on early signs of how the iPhone 6 is performing in the market, it looks like the optimistic forecasts were right. But with Apple now satisfying demand for an iPhone with a larger display, 2016 might not be such an easy win.
Even a slight year-over-year decline in iPhone sales could have a meaningfully negative impact on Apple's business results in the first quarter of 2016 if it is up against 71.5 million iPhone sales at 75% of revenue in the year-ago quarter.Since the iPhone is Apple's most profitable product, the decrease in revenue could have an outsized negative effect on the company's earnings.
In short, if iPhone sales do decline in 2016 -- and there's a strong probability this could happen if the iPhone 6 is as successful this quarter as analysts predict -- it will be extremely difficult for Apple to prevent a year-over-year decline in earnings.
Apple Watch. Image source: Apple.
Hope isn't lost
To be fair, Apple has other businesses that could help offset tough comps for iPhone sales in coming years. For instance, Apple's app sales, while still a small percentage of revenue, are soaring fast. And Apple Pay could prove to be slightly accretive to earnings over the long haul. Then, of course, there is potential from new products and services that Apple could be working on that we don't know about yet. Finally, there's the elephant in the room: the Apple Watch. Who knows, maybe it will surprise us all.
While the risk of tough comps for the iPhone line in the coming years isn't enough for me to call Apple a sell, it's definitely a development worth keeping an eye on.
The article The Biggest Risk for Apple Inc. Stock in 2015 and Beyond originally appeared on Fool.com.
Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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