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The heavily-anticipated Apple earnings report for their fiscal fourth-quarter 2018 finally arrived to a somewhat anticlimactic conclusion. On one hand, the bulls felt delighted at surging total revenue and earnings, both metrics beating consensus targets. However, iPhone sales disappointed against Wall Street’s forecast.

Indeed, the markets took a dim view of the earnings report, quickly punishing Apple shares. For investors, Thursday was a picture in contrast. Prior to the quarterly disclosure, AAPL closed up a fairly robust 1.5%. But during the tail end of extended trading, the equity fell more than 6%.

In all honesty, we shouldn’t be that surprised how the markets reacted. Apple shares have built their identity around their flagship smartphone category. Without continuously driving iPhone sales through the stratosphere, the Street has trouble justifying its market premium. This is, after all, a trillion-dollar company.

Nevertheless, the bulls became emboldened at the news because of one critical metric: average selling price. While iPhone sales of 46.9 million didn’t terribly miss consensus forecasts calling for 48.4 million, a 3% drop isn’t insignificant. However, iPhone ASP jumped 41% above expectations to $793.

AAPL proponents argued that Apple is achieving virtually the same iPhone sales against fewer units. That confirms buyers are eschewing cheaper models for more expensive outfits like the iPhone X.

So should investors buy into Apple shares? In my opinion, I’d exercise some caution.

 

Declining iPhone Sales Point to Commoditization Concerns

I’m not entirely against buying AAPL, especially if you feel the current meltdown is temporary. However, Apple shares carry emotional baggage. Just having a slightly-negative view on AAPL will automatically arouse angry fanboys and internet trolls.

Moreover, CNBC recently ran an informal survey to gauge whether Apple shares will move higher or lower at year’s end. At the time I took the survey, 80% had a bullish opinion, while only 20% were cautious. That’s a perfect representation of Pareto’s Law, which I find odd.

Either way, even the bulls should pause before getting to deep into AAPL. Although the ASP for iPhone sales increased dramatically, that is also the very source of bearish anxiety. For one thing, more people are completely ignoring Apple’s “fighter models,” and only focusing on the flagships. That ultimately hurts profitability longer-term if you’re building products that no one buys.

Second, a steadily-rising ASP is desirable. An ASP in one fell swoop? That’s not so positive. It means that the nominal consumer base for iPhone sales have declined, resulting in higher prices per unit.

But what happens when Apple no longer builds a smartphone that’s more compelling than the competition? At that point, a higher ASP is a liability because your already-declining consumer base will move somewhere else.

And really, that’s what we’re seeing in smartphones worldwide, not just iPhone sales. What the earnings report suggests is that a cold winter is in store for companies which can’t innovate.

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