Apple Drops the Ball; iPhone Sales Set to Plunge

Image source: Apple.

According to a research note from respected KGI Securities analyst Ming-Chi Kuo (via MacRumors), Apple (NASDAQ:AAPL) is on track to see a steep decline in iPhone shipments during 2016. The analyst cites three major factors driving what he expects to be a double-digit decline in iPhone shipments for the year.

The first is that the market for high-end smartphones has gotten more aggressive. Indeed, Apple's flagships are now being outdone in significant ways compared to what competitors are doing (display quality, device thickness, camera quality, etc.), quite often at lower price points, too.

Next, Kuo blames "time needed for commercialization of new user experience technologies." It isn't clear to me what Kuo means by this, but I suspect that he may be referring to the fact that Apple is sometimes slow to adopt interesting features and technologies, at least compared to peers.

Finally, Kuo argues that the iPhone is in need of a dramatic overhaul in terms of industrial design/form factor. The iPhone 6s family looks largely like the iPhone 6 family, and current rumors suggest that the iPhone 7 won't be much of a departure in the looks department from the current iPhone 6s.

Could fiscal 2017 be another bad year for Apple?At this point, I think investors have mostly written off fiscal 2016 as a bad year for the iDevice maker. It's clear that the iPhone 6s phones weren't good enough to convince users to upgrade, and for a while, all eyes have been on iPhone 7 as the product that will allow Apple to turn it all around in fiscal 2017.

However, according to Kuo, the iPhone 7 won't have "many attractive selling points." Given that he is well-known for being plugged into Apple's supply chain, this claim is very hard to dismiss.

Execution issues at Apple? The fact that Apple is getting outgunned by lesser-known China-based smartphone players in terms of both sales growth and, in some cases, features appear to be a reflection of execution issues.

A company that lives and dies by providing customers with best-in-class user experiences, and as a company that has, by far, the highest average selling prices in the industry, there is no excuse for the its products being anything less than the best.

However, Apple's current flagships are behind in terms of display performance/quality, camera performance, and arguably even form factor.

To be blunt, it would seem that the iPhone 7 that is being described in the press is the phone that should have been launched in late 2015 and the massively redesigned 2017 iPhone Kuo has mentioned repeatedly should be what Apple is putting out this year.

How can Apple course correct?The best way for Apple to "course correct" would be to shorten the lifecycle of the upcoming iPhone 7. This phone should be in the market until, perhaps, the June time frame. At that point, it would make sense for Apple to jump-start iPhone sales with the brand-new, redesigned model.

If Apple really wants to get fancy, it could commit to shorter, nine-month product cycles. This would require it to invest more in technology/product development teams to support an accelerated schedule, but the incremental spending would likely be peanuts compared to the potential for an acceleration in revenue growth.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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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