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The world s most valuable firm may be past its prime
Jan 26th 2013 | SAN FRANCISCO |From the print edition
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.