Has Apple peaked?
The world’s most valuable firm may be past its prime
Jan 26th 2013 | SAN FRANCISCO |From the print edition of The Economist
TECH blogs are abuzz. Pundits are busy pumping out predictions. The company that makes the new device that is attracting so much attention is teasing reporters by being coy about its innovative features. Apple’s product launches are always like this. But this time the fuss is not about an Apple product: it is about Samsung’s latest Galaxy smartphone, which is likely to be launched in March. Stiffer competition in smartphones and tablets from the likes of Samsung has spooked investors in Apple. They got another fright on January 23rd when the firm revealed that its latest quarterly profit of $13 billion was flat because of higher manufacturing costs. That triggered a rout in after-hours trading: at one point some $57 billion was wiped off Apple’s market capitalisation, roughly the equivalent of the entire value of Ford, a carmaker. Apple’s shares have been mauled by bears many times before (see chart 1), but they have always recovered. The big question on many investors’ minds is whether the firm can rebound again. Two things have whetted the bears’ appetites. First, Steve Jobs, Apple’s founder and creative genius, is dead. The iPhones and iPads he sired still generate gargantuan profits. But his successor, Tim Cook, has yet to prove himself capable of bringing new breakthrough products to market. Second, Apple’s fantastic profit margins—38.6% on sales of $55 billion—attract competitors like sweetshops attract six-year-olds. The company’s fans pooh-pooh the idea that Apple has peaked. The firm’s price-earnings ratio— 11.6 at close of business on January 23rd—is not much different from Microsoft’s (see chart 2). That makes Apple’s shares look relatively sexy. Unlike Microsoft, which depends heavily on the ailing personal-computer business, Apple concentrates on sectors that are growing fast, such as smartphones and tablets. Only one of 60 analysts tracked by Bloomberg had a “sell” recommendation on Apple before this week’s stockmarket fallout.
A drizzle of negative news had already dampened investors’ ardour before this week’s earnings announcement. Apple bungled the introduction of its new mapping app, and there were rumours of cuts in component orders for the iPhone 5. But iBulls still expect sunshine this year: news of new gizmos that Apple has created and new markets it is set to disrupt.
One of those gadgets is likely to be a much cheaper iPhone aimed at emerging markets. In China, where some men have reportedly been dumped for failing to buy their girlfriends iPhone 5s, Apple sold 2m of its top-of-the-range devices over its launch weekend last month. However, most Chinese shoppers can’t afford the things. Barclays, an investment bank, reckons Apple could produce an iPhone for less than $150 to broaden its appeal. The firm has played down reports of a cheaper iPhone, but Apple-watchers expect an announcement this year. Slimmer profit margins in China and India may be worth it to woo millions of new buyers. Apple is said to be close to a distribution agreement with China Mobile, a carrier with a hefty 700m subscribers. News of a deal may boost Apple’s shares. Yet the best way for the company to prove it is not past its prime would be for it to disrupt another big market. Since Jobs’s death in 2011 Apple has concentrated on sprucing up its existing products. Now investors want to see it conjure up entirely new ones. All eyes are on television (though Apple is also exploring the potential of other markets, such as wearable computing: see article). Mr Cook says television is an area of “intense interest”. He told interviewers that when he switches on the TV in his living room, he feels like he has “gone backwards in time by 20 or 30 years.” This fuels expectations that Apple will launch an iTV later this year.
Sceptics point out that plenty of elegant, wafer-thin screens are already on sale. Moreover, Apple’s existing set-top box, which lets users play content from iTunes, Netflix and other services on their TVs, has not been a stunning success. But this misses the—so to speak—bigger picture. The iTV, which may be controlled via gestures and voice commands as well as via iPads and iPhones, could be a digital hub for the home. It would let people check whether their washing machine has finished its cycle while they gossip on Facebook and watch their favourite soap. Peter Misek of Jefferies, an investment bank, says sales of it should also boost purchases of iPads and other Apple gear, as more people get sucked into the firm’s “ecosystem” of linked devices and software. But the iTV is no surefire blockbuster. For one thing, persuading cable and broadcast outfits to make programming available over the internet on demand will be tricky. They have already seen how such a model crushed music companies. For another, iTVs are likely to be pretty expensive, limiting their mass-market appeal. Apple will also, as usual, face stiff competition from Samsung. The South Korean firm is one of several that already sell smart TVs. Indeed, Samsung seems to be churning out more and more groundbreaking devices while Apple has produced only incremental innovations of late. Apple’s court battles with Samsung over smartphone patents have reinforced the impression that it is on the defensive.
However, Horace Dediu of Asymco, a research firm, says it would be a mistake to think Apple is resting on its laurels. He notes that its capital expenditure has soared in recent quarters, reaching levels typically seen at firms with huge manufacturing operations, such as Intel (see chart 3). Some of this money is going into data centres to support cloud services like iTunes. But Mr Dediu reckons much of it is being spent on dedicated production equipment at suppliers. This could give Apple an edge in producing new gadgets. Yet even if it produces a cheaper iPhone, pushes deep into China and wows the world with a smart TV, its shares will not reconquer last year’s peak. Competition is now tougher in its core markets. Rivals will not let it disrupt new ones so easily. Apple may dip into its $137 billion cash lake to boost its share price by paying fatter dividends or buying back more stock. That would delight some investors, but others would see it as a tacit admission that the firm’s great innovation engine has stalled. Apple won’t crumble, but it has peaked.