Have We Seen Peak Apple?

Apple has maintained a great amount of momentum and growth since the launch of the first iPhone in 2007. Last week, Apple announced their first quarter earnings, which is Apple’s most important quarter of the year as it follows the holiday shopping season. Apple saw the smallest growth in iPhone sales since its launch year, and their other two major segments iPad and Mac saw declines. Apple also offered guidance for the second quarter that would be a decline on last year’s earnings. All of it combined shows that Apple’s unprecedented growth over the past few years has become unsustainable, and Apple’s future isn’t as clear.
The biggest question with all of this information from Apple is whether or not we have seen peak Apple. Apple did set a first quarter record of $75.9 billion in revenue and $18.4 billion in profit, though they were both just barely increased over the previous year’s quarter. The earnings consisted of the second most prolific quarter of any company ever, and on that list Apple’s past few years fill 7 of the top 12 spots. This could be the top of the mountain for Apple, and decline may ensue. There are significant warning signs, and yet on the flip side these indicators could push Apple to be more aggressive with future products.

The iPhone is Apple’s key contributor, constituting 68% of their bottom line, so a lack of growth, or decline in iPhone sales would be the biggest hit. Apple sold just 300,000 more iPhones at the end of 2015 as compared to the end of 2014, granted this was an “S’ year. Perhaps, Apple pushes more features to the iPhone 7 this year to buck the trend. We could see an iPhone 7 with a thinner design, improved processor, enhanced camera sensor, and even a higher resolution display. That won’t happen this September though, and in the meantime the iPhone 6S needs to fill in the first eight months of the year. Apple could release a successor to the iPhone 5C, the 6C, in the spring time to help buoy iPhone sales in the interim, and offer another choice in their line-up with a new plastic shell offering, and the old 4” screen size. 2016 will be a big year for Apple, and the iPhone if they want to bring growth back.
Beyond the iPhone, Apple’s next two biggest contributors have declines and question marks. Sales of the iPad have declined quarter over quarter since Q2 of 2013, and that includes this past quarter that saw a 25% decline even with the launch of the iPad Pro. The tablet market as a whole isn’t maintaining growth, and there are more players in the space. The iPad is being crunched from multiple sides with old iPads, bigger iPhones, and lighter Macs. Many earlier iPad owners are upgrading their devices more like computers, than smartphones, so there’s less upgrading. The 5.5” iPhone 6/6S Plus offers some nice screen real estate for some to not need an iPad. Macs are getting lighter and lighter, and do a lot more for particular use cases than the iPad. The biggest problem for the iPad is that it’s tough to see anything that could change the decline as there aren’t many advanced hardware features to push upgrades. Haptic displays could be a big change, but seem more Sci-Fi- than reality, and a new processor, bigger or better screen, and improved camera aren’t going to do it. Software could help, but Apple is keeping OS X functionality away from the iPad, leaving little to upgrade there.

The Mac’s problems stem from the entire PC industry that has seen four years of decline, including 10% throughout 2015. The Mac isn’t going to be a cure for Apple as it makes up just 8% of their bottom line, and has stayed steady at that point over the last few years, even as Apple’s Mac sales outpace the rest of the PC industry. A merger of the Mac and iPad lines doesn’t seem to be in the cards for Apple, and could possibly dilute both segments earnings even further. Apple’s only other growth areas were in services that include the App Store and iTunes Store, and the “Other” category. Services have grown year over year, with a bulk coming from the App Store. When Clash of Clans and Candy Crush make $1 billion in revenue, Apple gets 30%, meaning $300 million just by selling those apps, and hosting their in-app purchases. The segment now accounts for the same 8% of both the iPad and Macs, and growth will likely continue as Apple has sold 1 billion iOS devices. Growth may continue in services, but minimally as these big app developers see growth stagnate as they try to diversify their offerings with new releases. The “Other” category may be the most intriguing as it’s home to the iPod, Apple Watch, and Apple TV.
Apple hasn’t broken down Apple Watch and Apple TV sales yet, but the “Other” category did see a billion more in earnings for the past quarter. The iPod has been left for dead, meaning the other two are the key drivers of the growth. With that said, they’re a small portion of Apple’s overall sales, and even combined don’t touch 4% of Apple’s totals. There’s growth potential for Apple Watch and the Apple TV with a likely Apple Watch 2 early in 2016, and a boost to Apple TV with a potential subscription offerings. It doesn’t seem to be enough to generate overall growth for Apple, and may just stem the tide of Apple’s other declines. Apple is trying to diversify their portfolio with more product lines, but there has yet to be another runaway hit to go with the iPhone.

We may have seen Apple’s peak simply because they have reached a level that no other company has before. The law of diminishing returns is front and center, as once Apple sells 75 million iPhones, it’s very tough to top that. The iPhone will continue to be a premium product, even as Apple pushes overseas adoption. A number of people upgrade to the iPhone, and it’s easier to upgrade with the new cellular contracts out there. The number of people upgrading might remain high, but it could be a market saturation problem of Apple reaching everyone who continues to upgrade their iPhone. Apple set a record on R&D expenditures in 2015, and that could have an impact down the road to create new growth potential. Apple isn’t going to fall off the face of the Earth, and even multiple subpar quarters can be offset by Apple’s $215 billion in cash and marketable securities. Apple could have just reached the height of what they can offer as a tech company.


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