Apple’s earnings this week were a classic case of good news, bad news.
First, the good news: the company posted record first-quarter revenue of $75.9 billion (U.S.) and record quarterly net income of $18.4 billion. Now, the bad: iPhone sales grew less than 1% over the same quarter a year earlier, the slowest year-over-year growth for the device ever.
Given that the iPhone accounts for about 68% of Apple’s revenue, the bad news looks to outweigh the good going forward.
Investors are starting to use the dreaded “M” word when it comes to Apple—maturity—and are considering it a “value” stock, or one that can be counted on for good, solid returns, but not one that will deliver growth.
Apple isn’t part of the FANG group—Facebook, Amazon, Netflix and Google—the sexy growth stocks that investors are currently loving. As of this writing on Wednesday, Apple shares were down 6% on the Nasdaq and about 30% from their 52-week high in February last year.
Apple’s return to growth status would depend on two things: whether the company can create new hit products, and whether the iPhone can rebound.
The first front is a mixed bag.
Questions continue as to whether the Apple Watch, the company’s big new product in 2015, is a success or not.
The company still isn’t disclosing sales, but the “other” category in its financial results—which counts the Watch, iPods, Apple TV and Beats headphones—improved 30% from the same quarter last year, leading at least one analyst to believe the company has moved about 12 million to date.
That would be a great result for many companies, but this is Apple, which sold 74 million iPhones in just one quarter. The $4 billion in revenue from the “other” category represents only 5% of the company’s total.
For the Apple Watch to be material to Apple’s financials, it will need to move out of that “other” slot and into its own. And, as has been argued ad nauseum, there’s no indication that the relatively small market for watches is big enough to justify such a move.
The Apple Watch may thus forever be destined a “hobby” for the company, the way that the Apple TV is.
Elsewhere, company executives are also starting to talk up how they might start to extract more money from iPhone users – which have been called “the most lucrative installed base in the world” – in the form of related subscription services.
Apple Music comes to mind, and it has met with some success, with 10 million paid subscribers so far. Some form of subscription news service, and possibly even video streaming, are also likely candidates.
Such efforts will be fraught with problems, as Apple learned in its reportedly aborted-for-now video service. Financially strapped news organizations may bristle at Apple wanting a cut from such a service, like how some banks have resisted Apple Pay.
As for other future products, like the cars Apple is supposedly working on, we can only guess.
Whether the company can deliver visionary new, reality-defying products that become bonafide hits is an open question, although critics would point out that Apple has largely failed to do so throughout its history without Steve Jobs’ involvement.
It’s probably premature to judge Tim Cook’s performance in that light, but heading into his fifth year as chief executive, he has yet to deliver a smash product – or distort the reality that such products often require to become smashes.
Speaking of, can the iPhone regain its crushing ways?
Odds are good that this year’s iPhone 7, or whatever it’s going to be called, will go gangbusters. As Cook has noted, about 60% of iPhone users haven’t upgraded since the iPhone 6 was released two and a half years ago, which is a lot of pent-up demand that can be mined.
Yet, that’s not necessarily a good thing. It’s increasingly looking like consumers are learning to skip the “S” versions of the iPhone, or the ones that come every second year that supposedly don’t have big new improvements.
If that’s the case, the 1% iPhone growth looks even worse extrapolated over a longer period because it means the bulk of sales are only going to come every second year.
The iPhone is likely to rebound this year, provided Apple can come up with a few new features and sell them as necessary, but it could experience even bigger doldrums in 2017 than it did this year if the “off year” pattern continues.
Investors are right to be concerned about the device’s momentum, especially given that smartphones are already facing rapid commoditization for every other manufacturer. The same might be inevitable for Apple.
That said, there’s no reason to panic yet—the company and its immense profits aren’t going anywhere any time soon.
However, absent any of the company’s previous “magic,” or the Apple Watch somehow defying the odds to become an enormous hit in its subsequent iterations, it does look like “maturity” and “value”are the watchwords going forward.
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