In 2018, Apple (AAPL -3.03%) became the first publicly traded company in the United States to reach a market capitalization of $1 trillion. While this achievement was widely celebrated, it wasn't long before the bad news started piling in, leading to a substantial decline in Apple stock.
Not only did Apple exit 2018 at a market cap well south of $1 trillion, but it didn't even leave the year as the world's most valuable publicly traded company. Last year was truly a roller coaster for the stock.
Image source: Apple.
Although Apple's current share price appears to bake in a lot of the negative news around its core iPhone franchise, it's still not a risk-free investment -- no stock is. Here are three risks to Apple shares that investors need to be mindful of in 2019.
1. A trade war with China
Apple generates a significant amount of its revenue from its Greater China region. Indeed, in fiscal 2018, the company derived $51.9 billion from the region -- a whopping 20% of its total revenue.
Apple already faces significant competition from local brands in China. Not only are those companies more aggressive on pricing for their higher-end models (since they're not necessarily gunning for Apple-level gross margin), but Chinese vendors also offer a wider range of devices spanning a broader range of price points than Apple does.
Now the ongoing trade war between the U.S. and China may be having even more of an impact. Indeed, Nikkei Asian Review recently reported that many China-based companies are actively providing incentives to employees to buy devices from Chinese smartphone giant Huawei, following the arrest of Huawei's CFO in Canada at the behest of the United States -- something that's surely going to add fuel to the proverbial fire.
Anything that puts Apple's business in China at risk is a serious concern for investors.
2. A poor smartphone market
The overall smartphone market didn't fare well in 2018. According to market researchers with IDC, "worldwide smartphone shipments are expected to decline by 3% in 2018 before returning to low single-digit growth in 2019 and through 2022."
Now, despite the last bit about growth going positive (albeit mildly so) in 2019 through 2022, there are a couple of things you need to remember. First, as my colleague Evan Niu wrote about the smartphone market in December: "What little growth ... is left is being driven by low-cost handsets from Chinese vendors."
Apple doesn't participate in the low end of the smartphone market -- the company's cheapest device is the 32 GB iPhone 7, which starts at $449. While this might seem cheap to consumers who buy Apple's latest flagship smartphones each year (those now start at $999 and go all the way up to $1,449), the reality is that even $449 is quite pricey in the larger scheme of things.
So, not only is the overall smartphone market just not a fast-growing one, but Apple's corner of it -- lucrative as it is -- looks set to become a smaller portion of the overall market. That's a risk that investors need to watch not only in 2019, but over the long term as well.
Indeed, to illustrate that risk playing out, Apple announced on Jan. 2 that it wouldn't be meeting its original financial guidance for the first quarter of fiscal 2019, reducing its revenue guidance to $84 billion from a prior projection of between $89 billion and $93 billion.
The reason for that shortfall? Apple claims that "[lower] than anticipated iPhone revenue, particularly in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline."
3. Competition
Apple undoubtedly has some strong competitive advantages in the marketplace. The Apple brand is extremely strong -- Interbrand, for example, names it the most valuable brand on the planet. Customers are often willing to pay a premium for a product offered by a company with a strong brand.
Apple's iPhones are also the only smartphones on the planet that run the company's iOS, which can make it harder for current iOS device owners -- particularly those who have invested in Apple's app ecosystem -- to justify switching to an alternative smartphone brand. (This works the other way, too, but data consistently shows that people tend to spend much more on Apple's App Store than they do on Alphabet's Google Play.)
Despite all that, Apple continues to face fierce competitive pressure from Android smartphone makers trying to move into the premium portion of that market -- and I don't see that abating in 2019. If anything, things could get tougher for Apple.
China-based smartphone maker Huawei -- a company that could be on track to surpass Apple in terms of overall smartphone unit shipments in 2019 -- is gaining traction with its high-end P-series and Mate-series devices. Samsung, Apple's perennial rival in the premium portion of the smartphone market, is also said to be planning some fairly dramatic changes to its upcoming Galaxy S-series devices, too.
In an already rough market for premium smartphones, losing significant market share to the competition would be even harder for Apple's iPhone business.
