Apple has been punished by investors in the wake of financial results that showed growth in revenues, iPhone sales and business in China. Shareholders were concerned that the tech group’s growth was not as meteoric as expected, so they sold down the stock.
However, last week, Apple’s shares surged on a 15 percent decline in revenues, falls in sales of iPhones, iPads and Macs, and a 33 percent drop in Chinese revenue.
Has Wall Street lost its bearings, or does it know something other people do not? After all, it is unlikely that the iPhone will ever repeat the red-hot growth of 2014, when larger-screened models drove the company’s biggest-ever quarter for revenues and profit.
Smartphone sales generally have cooled. From 2010 to 2012, annual growth rates for all handsets were between 60 percent and 90 percent, but far this year, worldwide sales growth has been below 1 percent.
Apple has underperformed the market, recording two successive quarters of falling iPhone sales amid fears that consumers will not flock to upgrade when Apple launches new models in the autumn.
Asked about those concerns last week, Apple chief executive Tim Cook said the non-hardware part of the business would take the strain.
Cook said he expected the services unit to be a star performer, through iTunes, app and iCloud storage sales.
“We think [revenue from] services will continue to grow very briskly,” he said.
Nonetheless, despite their positive response last week, investors are understandably keen for Apple to unearth another big seller. Could “Project Titan” — the codename for Apple’s electric car project — be the new smash hit? Or might virtual reality (VR) headsets, or some augmented reality product akin to Pokemon Go, prompt a new reason for overnight lines outside Apple stores?
Analysts are skeptical. With 1 billion iPhones sold since the handset’s 2007 release, it is the most successful consumer product ever, generating almost US$625 billion in revenues in just nine years.
Apple will struggle to come up with a concept or a category that matches the iPhone — what other high-tech product could you potentially sell to everyone in the world?
There are 2.5 billion smartphone users around the world, according to estimates by Benedict Evans, an analyst at venture-capital firm Andreessen Horowitz.
The likely buyers of the next 2.5 billion smartphones will not be typical iPhone customers.
“Most of these people are in emerging markets, and most will be buying phones for under US$50 and certainly under US$100,” Evans said.
In other words, the high-value users Apple has always targeted have mostly been picked off.
Cook’s reference to services is part of the company’s new narrative, where its future profits come from users buying a mix of hardware upgrades and content of some sort, such as apps, music or TV shows. The latter will include James Corden’s Carpool Karaoke, after Apple bought a distribution license for the viral smash hit from CBS.
That will not make the stock rocket, but former stock analyst Neil Cybart, whose Above Avalon consultancy focuses on Apple, said the character of the people and institutions owning its shares has changed.
Apple used to be a “growth stock”: Its price rose in a long bull run — beginning when founder Steve Jobs rejoined in 1997 — hit a trough of US$56 in June 2013 and recovered to what looks like a final peak of US$130 in May last year.
Since then, the growth buyers have been replaced by value investors who want a reliable dividend, not a rollercoaster ride, Cybart said.
Writing ahead of last week’s results, he called it an “expectations reset” and said: “One sign that a company’s expectations have truly been reset [with Wall Street] is that company’s stock price increases on negative news.”
That duly happened.
Two notable stockholders exemplify this shift. The first is Carl Icahn, an activist investor.
He bought into Apple in 2012, repeatedly suggested the stock was worth double its price, then sold all his Apple stock in April, citing fears about China after Apple’s earnings fell.
The second investor is Warren Buffett, renowned for being uninterested in tech stocks, but very interested in solid long-term returns. A month after Icahn dumped his holding, Buffett’s Berkshire Hathaway bought a US$1 billion stake in Apple.
Buffett sees Apple as a reliable cash machine through its dividend, which it began paying in 2012.
And the dividend is attractive, as long as you do not think that the iPhone maker is about to fade away — which, as Evans says, is probably a safe bet.
Richard Windsor, formerly of Nomura Research and now running his own Radio Free Mobile consultancy, said it is simpler to think of Apple stock not as equity, but a bond — paying a return (through its dividend) on the investment of buying it.
He said that Apple’s dividend is currently running at US$52 billion a year; that gives it an effective yield of 9.8 percent per annum.
Over the past quarter, the yield has remained above 2 percent and dividends are paid quarterly. Of course, unlike a bond, there is no guarantee either of getting the capital invested in the shares back, or of a regular payout.
However, Windsor said: “For those that are not worried about capital growth, this is a no-brainer. Most companies with bonds yielding 10 percent are highly distressed.”
Apple, however, is not in distress — though Cook must hope that this autumn’s phone releases regain momentum, alongside new versions of the Watch, iPad Pro and Mac computers.
Revenues will probably never hit the heights of 2014 again, but when he visits the studios of Apple design chief Jonathan Ive to see the latest car mock-up, Cook will not have to worry where the company’s next billion is coming from. We have reached peak iPhone, but it will remain a money-spinner for some time yet.
WHAT’S ON THE WAY?
After the blockbuster hits of the iPod, iPhone and iPad, what lurks in Apple’s laboratories and design studios that could revive its success in hardware? Nobody outside Apple is certain — the company is notoriously secretive — but its hirings and patent filings give strong clues.
Virtual reality: Headsets that immerse the user in video and audio may be the next big thing. Facebook spent US$2 billion on the company behind the pioneering Oculus virtual reality headsets, and other technology companies are investing in the concept heavily.
Cook has called VR “really cool” and patents have been filed — but any future product might depend on how the broader market develops.
Augmented reality: Superimposing virtual data on to real scenes, or augmented reality (AR), is the concept behind the Pokemon Go craze.
Microsoft and Google are working on their own forms, and Cook talked it up in the latest earnings call. Future iPhones could form the basis for an Apple AR push.
TV content and channels: Apple has bought distribution rights from CBS to Corden’s hugely popular Carpool Karaoke, where celebrities such as Adele join the chatshow host for in-car singalongs, which will be distributed through its Apple Music service. It is also seeking would-be participants for a reality show titled Planet of the Apps.
Such moves suggest that Apple will launch its own TV service through its Apple TV set-top box, based on a bundle of shows cherry-picked from major channels.
Cars: Documents and hirings clearly show that Apple is working on a car under the codename of Project Titan. Electric? Surely. Self-driving? Perhaps. The timescale is uncertain, but the company recently brought back Bob Mansfield, the manager behind products like the iMac, iPad and Watch, pictured, to oversee Titan.
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