How does Apple keep bucking the price trend?

Does a combination of falling sales and higher prices spell trouble for Apple?

Apple
Source: Bloomberg

It has not been a month since Apple last hit an all-time high. Yet many will wonder how the giant can achieve this when iPhone sales continue to weaken.

The answer is not hard to find. A quick look at iPhone prices show that the firm has pulled off a remarkable feat, namely it is selling iPhones for higher prices at each release, despite the fact that the product itself has been around for over ten years. By now, so the theory goes, the product should have become much cheaper. But that is not happening, as the chart from the Financial Times shows:

How Apple raised the price of the iPhone

Base price of unlocked iPhone 5s to iPhone Max (US$)

Sources: company, VentureBeat @FT

iPhone price chart

How Apple raised the price of the iPhone

Base price of unlocked iPhone 5s to iPhone Max (US$)

iPhone price chart
Sources: company, VentureBeat @FT

The iPhones now regularly cross the $1000 barrier, and there seems no chance of the trend changing direction. CNN, using Apple’s data, has found that iPhone sales have dropped back from their peak in 2016:

Apple's iPhone sales per quarter are flatlining...

Source: Apple

Apple falling sales

Apple's iPhone sales per quarter are flatlining...

Apple falling sales
Source: Apple

Apple has found its place as a luxury brand, and seems content to let others dominate the cheaper end of the market. And this is no bad thing. From a valuation perspective, it is now more expensive on a forward price-earnings (PE) basis than at any time since 2010. Its forward PE of 16.6 is now comfortably above its five-year average of 13.2.

But as a luxury firm, Apple’s valuation would not be undemanding from a comparative perspective. The S&P Luxury Index has a forward PE of 17, so Apple would fit comfortably within that. This reduces the potential for nasty surprises.

Of course, it is possible that the decline in sales will outpace the increase in price of new models. In which case, Apple is in trouble. And admittedly it has to deal with a demanding valuation, so the risk of disappointment will increase. Investors can hardly argue with the momentum and fundamentals shown by the shares, but chasing them at all-time highs may not be the best strategy.

On average, September sees some weakness for Apple shares. Over the past 20 years, September is in fact the weakest month of the year, down 1.3%. But that is followed by an average 7% gain in October, 3.1% in November and 0.4% in December. The seasonality chart, to all intents and purposes, is a straight line:

Apple stock saw a significant retracement in June, but this latest sell-off merely provided the excuse for new longs to pile in. At present, the stock has struggled around $220, but any major pullback will simply fall into the ‘buying opportunity’ category until we see a move below $175 in the near term.

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