Price Hikes Could Create a Major Problem for AAPL Stock

Apple (AAPL) recently raised its prices on its MacBooks and iPads by roughly 16% to 20% in response to its sharply higher memory costs. The move pushed AAPL stock down 6.12% on the day it was announced, although the shares subsequently recovered a significant portion of the loss. Nevertheless, the initial downward move indicates that many investors fear that the price hikes could negatively impact the demand for the company's products. And investment bank Evercore also believes that the move may meaningfully reduce the demand for the tech giant's offerings. If such a scenario materializes, the company's revenue growth could easily decelerate, resulting in a meaningful decline of its share price. 

Although AAPL hasn't yet increased the iPhones prices, which typically generate large sales compared to its overall revenue, it will probably make the hikes in September. Such a decision will likely trigger another, large downward move by AAPL stock.

Meanwhile, the company's AI strategy is unlikely to positively move the needle for its shares. And finally, this episode highlights the negative aspects of the firm's failure to generate larger revenue from areas other than its core computer-hardware offerings.

It's unlikely that AAPL stock will meaningfully outperform the Nasdaq 100 Technology Index ($NDXT) for at least the next six months. The shares could easily drop a great deal in the near-to-medium term. Therefore, investors may want to consider selling AAPL stock.

Potential Demand Declines, iPhone Price Hikes Could Hit AAPL Stock

Evercore recently warned that Apple's price increases “raise the risk of some demand friction across Macs and iPads.” In other words, the investment bank believes that the move could meaningfully reduce the demand for Apple's devices. Such a scenario, in turn, may cause Apple's revenue growth to decelerate significantly from the 17% year-over-year (YOY) gain that it registered in its last reported quarter. The latter development, in turn, could further spook investors, potentially causing its share price to sink below $250. Investors may learn that Apple's revenue growth is decelerating as soon as July 30, when it's due to report its fiscal third-quarter financial results.

Evercore also left the door open for the firm to raise its iPhone prices in September, when AAPL's new iPhone models are slated to be launched. The investment bank stated that "The iPhone exclusion keeps the [near-term] impact contained but also sets up September as the next key pricing event.” Officially, the iPhone generates roughly 50% of the firm's revenue. But since most consumers purchase the majority of their apps through their smartphones, a decline of iPhone's market share could also materially lower the revenue that the company obtains from its App Store.

Apple does not report the revenue that it obtains from the App Store. But after 35 days of last quarter, the App Store's revenue was $3.4 billion, Bank of America reported. That equals a quarterly run rate of about $8.75 billion, or nearly 8% of Apple's overall top line for the quarter of $111.2 billion. So an iPhone price hike could negatively impact around 60% of the firm's revenue.

An Uninspiring AI Strategy and a Lack of Diversification

Because Apple's new AI offerings primarily rely on Google's technology and lack a first-mover advantage, it's unlikely to generate  shares gains for the firm's offerings. 

Meanwhile, the problems that Apple is having due to its high flash-memory costs highlight the firm's lack of diversification and the problems that this phenomenon can cause. Specifically, computer-hardware offerings continue to generate the lion's share of its revenue and profits. As a result, when a negative catalyst affects this business, the company's financial results are likely to be negatively affected to a large extent.

Conversely, Alphabet (GOOG) (GOOGL), Microsoft (MSFT), and Amazon (AMZN) have successfully launched cloud-computing units that significantly diversified their offerings, and Amazon is about to become even more diversified by launching a huge satellite business. Similarly, Google is looking to develop space-based data centers, and its Waymo unit may be a few years away from generating needle-moving revenue for the company, while Microsoft's AI business looks promising. 

Under Tim Cook's leadership, Apple tried to enter new areas, including electric vehicles and TV content. But none of these endeavors were significantly successful. If Cook's successor,  John Ternus, is able to more effectively diversify the tech giant, AAPL stock will become much more attractive. Ternus is due to take the reins on Sept. 1.