Which way are you going, Tim Cook?
Apple just delivered a record quarter of iPhone sales, 51 million units, a 6.7% jump in sales year-over-year. And yet Wall Street seems to hate the company right now: The stock fell over 8% after hours and opened this morning at ~$508, down from ~$550 the day before.
It dropped another 7% in early trading.
The general theme emerging with investors is: Apple has entered an era of low-to-no growth; it has made some sort of pricing error with the too-expensive-for-not-enough-phone iPhone 5C; and the iPhone is being boxed into a high-end consumer demographic while the majority of the world happily communicates on Android, the cheaper competitor.
'Are you still a growth company?'
On yesterday's call with analysts, Ben Reitzes of Barclays asked the most brutal question of CEO Tim Cook: "My question is, are you still a growth company?"
That's the kind of question you put to fusty old packaged goods companies that sell soap and toilet paper in groceries, not the company that stands at the pinnacle of American tech innovation.
We'll get to Cook's response in a moment, but first some perspective.
Never underestimate Apple. The company remains the ne plus ultra of tech firms, it attracts the best talent and it has a country-sized bank account it can use to buy or create whatever it wants. Several times, Apple has created new markets for devices out of thin air. It routinely confounds its competitors. So if you're an Apple hater, enjoy this moment of doubt — history says it is likely to be short-lived.
More importantly, Apple has a huge new product cycle coming up that could involve the launch of an iPhone 6 with a big "phablet" screen, an Apple TV, and/or maybe an Apple smart watch. The recent launch of iTunes Radio has yet to play out, but it shows that Apple isn't done reorganizing the entertainment industry.
Cook partially blamed the iPod for Apple's lack of growth.
Yet Apple might shrink
Apple's problem is that right now, these are all rumors and conjecture. In the real world, Apple might even shrink as a company. Here's that painful exchange with Barclays' Reitzes:
My question is for Tim. You’re at the midpoint of your guidance. It obviously implies a decline in revenue in the quarter coming up, and you haven’t done that forever. You came pretty close a couple of quarters ago, but you had some growth. And my question is, are you still a growth company? And should we expect the growth rate to accelerate as we go throughout the year? And why, if that’s the case?
Cook's response was technical and meandering. At one point he blamed the iPod. At another, he suggested that the stats don't say what they ought to say, so maybe we should look at some different stats:
I think it’s important to listen to what [CFO Peter Oppenheimer] said about the guidance, and about the compares year over year, and the point that he made that the underlying sell-through, that we’re very confident of growth year over year. And that is the way we look at it. Some people just look at the numbers on a piece of paper, but the way I’d look at the business is our business from a sell-through point of view less iPod, because I think all of us have known for some time that iPod is a declining business.
And when you do that, the numbers from last quarter, and the deferral, which we’ve just increased, as Peter went through, when you look at that, and look at the numbers from last quarter, it comes up to a double digit growth. And we’re proud of that. I think that’s a pretty good result.
Is Apple no longer in control of its fate?
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"Our North American business contracted somewhat year over year."
This was a typical response on the call. Cook and Oppenheimer alternately blamed inventory patterns, foreign currency headwinds, bad comparables from the prior year, and wireless carrier policies that are less generous to people who want new phones.
It was not awe-inspiring stuff.
It made Apple look like it was suffering from events that are beyond its control, rather than being in charge of its own destiny.
At one point Cook admitted the American iPhone business was shrinking, but he blamed it on Apple's own incorrect estimates of which phones customers actually wanted:
In North America, we did not do as well, and this weighed our results. Our North American business contracted somewhat year over year. And if you look at the reason for this, one was that as we entered the quarter, and forecasted our iPhone sales, where we achieved what we thought, we actually sold more iPhone 5Ss than we projected.
And so the mix was stronger to the 5S, and it took us some amount of time in order to build the mix that customers were demanding. And as a result, we lost some sort of units for part of the quarter in North America and relative to the world, it took us the bulk of the quarter, almost all the quarter, to get the iPhone 5S into proper supply.
The other issue here is the problem of big numbers. Apple is so successful that getting double-digit percentage growth is simply much harder than it used to be. Look at this chart:
The issue here is not that Apple is failing, it's that Apple is now so big it's hard to see where new iPhone buyers might come from.
What if China doesn't rescue Apple?
One answer, Apple hopes, is China.
But Toni Sacconaghi of Sanford Bernstein suggested that China was a symptom of the problem, not the cure. Apple was making machines that are so expensive they don't appeal to most people, he argued, and this is hurting Apple's growth:
... if we look at your prior four quarters, fiscal ’13, Apple grew its iPhone units about 20%. The market grew in the 40s. I think this quarter, even with a new product and having China front loaded, the iPhone is going to grow at a fraction of ultimately what the market is likely to grow at.
And I know your belief and philosophy historically has been that you want to make the best product, and that’s the most important thing, but in Macs, you’ve actually succeeded in making the best product and being able to gain share. You cited again how you’ve gained share in 30 out of the last 31 quarters in Mac. But in iPhone, that is not happening.
... do you propose to do anything differently going forward?
Cook was careful to note that Apple's deal with China's largest wireless carrier, China Mobile, was only a couple of weeks old and had yet to hit results. "We’ve been selling with China Mobile now for about a week, and last week was the best week for activations we’ve ever had in China. So it’s been an incredible start, and at this moment, we’re just selling in 16 cities with China Mobile," he said at a different point in the call.
But Sacconaghi's subtext was clear: Your strategy is wrong.
Ridiculous pessimism ... but the pressure is warranted
Mike Nudelman/Business Insider
Analysts are still comparing Cook to Steve Jobs.
But even Piper Jaffray's Gene Munster put out a gloomy note this morning talking about "core markets will make it difficult for new products to meaningfully reaccelerate revenue growth" and "a slowdown in US smartphone growth."
One analyst, Bert Dohmen of Dohmen Capital Research Institute, believes AAPL will fall to $320. "Apple hasn't had any technological innovations since Steve Jobs left, and this is a company that's getting beaten by its competitors. Now, we hear the next big item (iPhone 6) is going to have a larger (screen) size, Samsung has had that for two years," he says.
That seems ridiculously pessimistic to us, especially when we know that Apple has several potentially huge new products in its pipeline that will likely start rolling out in calendar Q4 2013.
But the fact that people are saying such things openly only puts the pressure on Apple: These new products had better be mindblowing, and not the mere upgrades we saw last year that led to the revenue slowdown we're seeing now.
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