Why Apple Inc's iPhone 6s Sales Failed to Impress Investors

Apple (AAPL -0.81%) sold 13 million iPhone 6s units during its launch weekend, a 30% jump from the 10 million iPhone 6 and 6 Plus units sold a year earlier. Those numbers sound solid, but Apple's numbers this year also included sales from China, which weren't included during last year's launch weekend.

The iPhone 6s. Source: Apple.

FBR Capital Markets analyst Daniel Ives estimates that Chinese consumers bought up to 2.5 million iPhone 6s units during the launch weekend, which would mean, that excluding China, iPhone sales only rose about 5%. Another issue is that the preorder period this year was nearly two weeks long, compared to a single week last year. If Apple had extended the preorder period last year, the year-over-year comparisons might look even worse.

Nonetheless, sales of 13 million units easily topped the 12 million units most Wall Street analysts had expected. But some more bullish investors, cited by Forbes, had expected Apple to sell 14 million to 15 million iPhone 6s units during the launch weekend. Those expectations might seem unrealistic, but that's the harsh reality that Apple faces -- its massive sales figures might never seem big enough.

The one thing every Apple investor fears
Apple's biggest weakness is its overwhelming dependence on iPhone sales, which accounted for 63% of its revenue last quarter. That's up from 53% in the third quarter of 2014 and 51% in the third quarter of 2013. Annual iPhone sales have improved every year since its introduction in 2007, but growth has slowed down every year.

Source: Apple annual reports.

Based on those numbers, it seems likely that iPhone sales could decline for the first time on a year-over-year basis in 2015. KGI Securities estimates that iPhone sales growth will be either flat or negative in the fourth quarter of 2015. Pacific Crest Securities believes that iPhone sales could decline 8% annually in fiscal 2016, calling the success of the iPhone 6 last year "unrepeatable".

Recent developments in China, Apple's most promising market, indicate that those predictions might come true. According to IDC, the Chinese smartphone market contracted for the first time in six years in the first quarter of 2015. After briefly becoming the top smartphone maker in China, Apple was overtaken by Xiaomi and Huawei in the second quarter, according to Canalys and Counterpoint Research.

Apple doesn't have much to fall back on if iPhone sales start slipping. iPad sales have declined for six consecutive quarters. Mac sales, which rose as iPad sales faded, only accounted for 12% of Apple's top line last quarter. The company's newest product, the Apple Watch, remains clumped together with the iPod, Beats devices, and other products in the "Other Products" category, which only generated 5% of Apple's sales last quarter.

The Apple Watch. Source: Apple.

The iPhone can't last forever
Apple won't admit it, but it knows that the days of iPhone sales rising annually are almost over. To diversify away from its biggest money maker, Apple is trying to revive iPad sales with a renewed focus on the enterprise market. It's launched new platforms like Apple Music, HealthKit, HomeKit, and CarPlay, and its own streaming TV service will arrive in the near future. There are also persistent rumors that it could manufacture cars on its own.

With over $200 billion in cash, Apple certainly has the financial firepower to expand rapidly across all of those markets. But unless Apple approaches these markets in a disciplined manner, it could turn into the old Microsoft under Steve Ballmer, which placed too many half-hearted bets on too many hyped-up industries.

The key takeaway
Apple's sales of 13 million iPhone 6s units during the first weekend still indicate that people love iPhones. But I believe that we're getting dangerously close to a tipping point, and that sales weren't as "phenomenal" as Cook suggested in Apple's press release.

On a fundamental basis, Apple stock certainly looks cheap at just 11 times forward earnings. But then again, low P/Es are common for mature tech companies with stagnant growth, which is exactly what Apple might become if it can't diversify away from the iPhone before its sales fade away.