Apple faces class-action lawsuit threat for not warning investors about tanking iPhone demand

  • A New York law firm is garnering support for a shareholder lawsuit against Apple.
  • That's after the company issued a shock revenue warning on Wednesday.
  • Bernstein Liebhard said Apple CEO Tim Cook can't reconcile his November optimism about iPhone sales in China with Wednesday's warning, where he blamed China's slowing economy for poorer-than-expected sales.
  • Apple has been ignoring the bigger reality about smartphones, which is that demand is slowing and they have become commoditised.

Apple has had its first whiff of legal action over its shock revenue downgrade on Wednesday, with New York law firm Bernstein Liebhard trying to garner support for a class-action lawsuit on behalf of shareholders.

In a press release on Wednesday, the law firm wrote: "Bernstein Liebhard LLP, a nationally acclaimed investor rights law firm, is investigating potential securities fraud claims on behalf of shareholders of Apple... resulting from allegations that Apple and/or its executives may have issued materially misleading business information to the investing public."

It asks Apple shareholders to join the lawsuit, but isn't clear whether the firm actually has any claimants as yet. Business Insider has contacted the firm for comment.

Apple revealed on Wednesday that its fiscal first-quarter revenue would be 7% lower than expected, coming in at $84 billion. It had previously predicted revenue between $89 billion and $93 billion. The company pinned the blame on falling iPhone upgrades and the slowing Chinese economy, among other factors.

Bernstein Liebhard LLP's investigation hinges on the fact Cook failed to warn investors about any of this earlier.

The company wrote: "[On] November 1, 2018 during Apple's fourth quarter 2018 conference call, CEO Tim Cook stated that '[o]ur business in China was very strong last quarter. We grew 16%, which we’re very happy with. iPhone in particular was very strong, very strong double-digit growth there.'"

That same quarter, Apple would stop disclosing iPhone unit sales.

Read more: Apple's sweet talk about its $10.8 billion services business was totally undermined by Netflix

In interviews through 2018, Cook maintained that the US would resolve its trade dispute with China, but offered no warning it was hurting business.

"I'm optimistic because trade is one of those things where it's not a zero-sum game. You know you and I can trade something and we can both win. And so I'm optimistic that the two countries will sort this out and life will go on," he told CNBC in September

Apple's troubles in China did not come as a great surprise to a number of analysts, given the open trade war and economic indicators. But it was the severity of the issues that caught some off guard. "We were surprised about the magnitude of the miss and the negative impact of China demand for iPhones," Citi said in a note this week.

Huawei Mate 20 emoji avatarShona Ghosh/Business Insider

As Bloomberg columnist Shira Ovide noted in a piece titled "Apple’s iPhone Warning Comes Years Too Late," Apple has also tried to ignore the bigger reality about smartphones.

Most people in the Western world probably own a smartphone of some kind and, as the devices become commoditised, it's harder for different companies to stand out.

Apple's solution to the "peak smartphone" problem was to raise iPhone prices, so it would continue generating huge revenue as and when people did upgrade. But likewise, any new innovation Apple can come up with often replicated by rivals in cheaper devices. In some cases, those rivals beat Apple to innovations like under-screen fingerprint scanning. That makes the iPhone's newer, steeper price harder for consumers to justify.

This may be why Apple talked up its services business, as a tacit admission that the iPhone wouldn't forever be the number one driver of its business.

Bernstein Liebhard is banking on the fact that disgruntled investors may have appreciated more straight-up honesty last year.

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