Shares in Apple (US: AAPL) were caught up in the recent global sell-off, which was fuelled by fears of an economic slowdown in China. Moreover, analysts remain doubtful that the Apple Watch, a revamped Apple TV and other new products can fuel top-line growth next financial year - the larger-screen iPhone 6 and iPhone 6 Plus propelled Apple to new highs in the year to September 2015. But investors may be undervaluing the promise of a new upgrade plan and the group's mooted entry into new markets.
UK investors will be aware that several companies' fortunes are tied to Apple's success. They range from microchip designers Arm (ARM) and Imagination (IMG) to device-testing specialist Spirent (SPT), Laird (LRD) - which makes protective casings - and advertising giant WPP (WPP). All eyes were on the US tech titan during its recent unveiling of the iPhone 6s and iPhone 6s Plus, which feature faster processors, better cameras and 'force touch' screens that can differentiate between hard and soft presses. Citing strong pre-orders, management said the smartphones were on track to surpass the 10m iPhone 6 devices sold during launch weekend in 2014. Apple also launched the iPad Pro, a large tablet that can be operated using a stylus and detachable keyboard. And the latest version of its Apple TV set-top box boasts an online store - where users can download music, games and films - and a voice-controlled remote that can be used to scour Netflix, iTunes and other apps with a single command.
But Apple is vulnerable to a slowdown in China. Its sales in mainland China, Hong Kong and Taiwan more than doubled to $13.23bn in the third quarter ended September, compared with growth of between 9 per cent and 26 per cent in other regions. Arguably more important is its continued strength in the Americas: sales there rose 15 per cent to $20.31bn in the period, or over 40 per cent of total turnover. Another key concern is that Apple will struggle to surpass its blockbuster performance this financial year, as its latest smartphones are less revolutionary than the iPhone 6 devices. Indeed, broker Susquehanna expects iPhone unit sales to leap 36 per cent to 230m this financial year, generating revenue of $153bn or two-thirds of total turnover. In contrast, it expects iPhone sales to dip 1 per cent in the next financial year.
Still, Apple has made some shrewd moves to ensure long-term growth. A new upgrade programme allows customers to pay about $32 a month for two years to receive the latest iPhone, enrol in the Apple Care service plan and upgrade their iPhone annually. Mobile carriers offer similarly priced plans, but the initiative promises to attract and lock consumers into Apple's ecosystem, drive music-streaming and App Store revenue, and speed up the 'replacement cycle', or how long consumers wait to upgrade their phones. Analysts at Susquehanna estimate that for every one in 10 iPhone 6s buyers who opt into the plan, it would boost the numbers of iPhone units sold by 3 per cent - or 7.5m - next financial year.
Worries over Apple's sales next financial year could prove overdone. Although Susquehanna forecasts lower iPhone sales, it expects rising iPad, Apple Watch and service revenues to mean total turnover increases 5 per cent. There's also scope for speculation: Apple will reportedly release an electric car in 2019. But one concern - and a potential overhang for Apple's shares - is the recent security breach of the group's App Store in China. Hundreds of apps were infected with malicious code after developers were tricked into using a fake version of Apple's software development tools.
Broker Susquehanna expects sales to rise about 27 per cent to $232bn in the year to the end of September 2015, driving operating profit up a third to $69.9bn. It predicts EPS will rise 40 per cent to $9.01.
