As iPhone Sales Slow, Apple Hangs On to its Mojo (AAPL)
Let's get this straight: You're not about to see signs of panic on the streets of Cupertino, California, the town Apple (AAPL) calls home.
The company that put touch-screen everything on the map remains high-tech's equivalent of Fort Knox. A market capitalization of $592 billion. A share price that's doubled in five years. Fanatical followers ready to buy anything from an expensive product line that includes computers, tablets and the venerable iPhone.
But about that iPhone.
When Apple releases its first-quarter earnings report for 2016, sometime around April 25, it's nearly certain that iPhone sales will show a decline for the first time in the company's history -- especially when that prediction comes from the top gun. During Apple's January earnings call for the fourth quarter, CEO Tim Cook acknowledged, "We do think that iPhone units will decline in the [upcoming] quarter."
How far down he didn't say, but Cook certainly didn't lock horns when one analyst asked about a possible sales drop of 15 to 20 percent in 2016.
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So on which side of the profit-loss tree will Apple fall? Many market observers and industry experts cast votes of confidence for the computing colossus. But that hardly guarantees smooth sailing ahead. Apple faces challenges on many fronts that could either prove its ultimate mettle as a high-tech legacy company, or put it on the humble-pie path from hip to square that Microsoft Corp. (MSFT) followed decades before.
Remember when the late Steve Jobs used to taunt the likes of International Business Machines (IBM) for being too stodgy and slow to innovate? You can imagine Jobs swearing up one of his famous blue streaks in his grave as Apple has gone from "think different" (its 1997 slogan) to no different.
"The real challenge is that Apple has unwillingly changed its business model from as the visionary innovator to a defender of its share in a rapidly saturated market," says K.C. Ma, director of the George Investments Institute at Stetson University in DeLand, Florida. He contends that some of Apple's recent launches have been more reactions than revolutions: the Apple Watch as a response to Fitbit (FIT), for example.
"Apple is a company that relies on rolling out the next killer product, but unfortunately, they haven't had a true market leader since the original iPhone," says Jay Sukits, a clinical assistant professor of business administration finance at the University of Pittsburgh's Katz Graduate School of Business. "Today, everyone who wants to own an iPhone already has one and every time Apple creates a new version, they are just singing to their own choir."
And that song isn't always in tune. The bulky iPhone 6 series certainly didn't generate the oohs and ahhs of previous models, a fact underscored by Apple's unveiling of the iPhone SE on Monday.
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After introducing larger and larger iPhones since the product debuted in 2007, Apple went in the opposite direction for the first time, arguably a nod to how much consumers prefer the compact iPhone 5 series. Statistics updated this past week by Mixpanel show more than a third of iPhone users still own a 5s or older -- and with 4-inch screens, the 5 and SE are practically identical in size.
And that creates a scenario unthinkable in the Jobs era: Apple, once copied by nearly every high-tech company within earshot, has copied itself.
"The iPhone was once seen as affordable luxury -- a fashion accessory with an anti-establishment edge," says D.J. Shaughnessy, portfolio manager with F.L.Putnam Investment Management Co. in Portland, Maine. "Now it's seen as expensive and almost indistinguishable from its competitors. Each successive iteration of the iPhone is less of a departure from the last model. More importantly, the brand is losing its identity as the innovator in the industry."
Granted, Apple sold 74.8 million iPhones total in the last quarter of 2015. Cook has called that "an incredible number," and he's right. But Wall Street, so skilled at giving positive digits a negative twist, saw it this way: short of forecasts and the slowest sales growth in iPhone history.
"I wouldn't say Apple has lost its mojo, but they're definitely facing some issues that they need to address," says Dovi Frances, managing partner of SGVC in Beverly Hills, California. "It's natural for products to go through a life cycle of birth, growth and decline. Apple has already been through this with the iPod and the iPad."
But if that happens to the iPhone, it's hard to imagine the blow Apple could take. In 2015, the iPhone accounted for almost 63 percent of the company's revenue. So before consumer iPhone fatigue sets in, the pressure is on for Apple to deliver a new niche product that diversifies its revenue stream.
Or perhaps not. For example, the iPhone could weather any drop in market share if smartphone demand grows overall. Todd Antonelli, managing director of the Berkeley Research Group in Chicago, says the global smartphone market is projected to grow by more than 40 percent per year through 2020.
He adds that Apple devices have a technological edge in accessing the mobile pay market, which is expected to explode to between $2.8 and $3 trillion by 2020. "Apple plays where the market will be, like Wayne Gretzky played the puck," Antonelli says.
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As for where the market is, or has been recently, the last 12 months haven't exactly proven kind to Apple. Its stock price is down 16 percent from March 2015, while its market cap is off more than 20 percent; for one scary day in January, it shaved $37 billion in a single day.
Still, an overwhelming majority of analyst firms sees this as a small pause while Apple finishes a few small repairs on its money printing presses: 21 of 31 rate Apple as a "strong buy," while only one lists it as a "sell."
"I think now is a good time for investors to 'take a bite' of Apple," says Robert R. Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. He adds that Apple's PEG ratio -- that is, the price-to-earnings ratio divided by expected five-year earnings growth rate -- is 0.95, "indicating that relative to future earnings it is attractively priced. It has a solid balance sheet with nearly $7 per share in cash, and its dividend yield of around 2 percent compares favorably to US government bond yields."
What's more, Cook has done a good job of taking care of investors. "Steve Jobs would hoard an ungodly amount of cash," Ma says. "Tim Cook would and has returned close to $200 billion, some borrowed, to shareholders in dividends and stock buybacks."
And when you think about it, what's the big deal about losing $37 billion in a day when you're the richest company around?
"Apple continues to have truly remarkable financial results," Shaughnessy says. "The valuation, cash flow and balance sheet are unassailable. It is arguably the most successful company in history."
But how it will stay that way remains to be seen. Literally, they can't just iPhone it in.
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