Tim Cook – and his investors – seem confident that TV programmes, music and software are the path to the future

Apple could never recreate the success of the iPhone. But it doesn’t need to

Apple has been punished by investors in the wake of recent financial results that have posted growth in revenues, iPhone sales and business in China. Shareholders were concerned that the tech group’s growth was not as meteoric as expected, so they sold down the stock.

Apple plans to invest in augmented reality following success of Pokémon Go Read more

Last week, however, Apple’s shares surged on a 15% decline in revenues, falls in sales of iPhones, iPads and Macs, and a 33% drop in Chinese revenue.

Has Wall Street lost its bearings, or does it know something other people don’t? After all, it is unlikely that the iPhone will ever repeat the red-hot growth of 2014, when larger-screened models drove the company’s biggest-ever quarter for revenues and profit. Smartphone sales generally have cooled. Unlike 2010-12, when annual growth rates for all handsets were between 60% and 90%, so far this year worldwide sales growth has been below 1%.

Apple has underperformed the market, recording two successive quarters of falling iPhone sales amid fears that consumers will not flock to upgrade when Apple launches new models in the autumn. Asked about those concerns last week, Apple’s chief executive, Tim Cook, said the non-hardware part of the business would take the strain. Cook said he expected the services unit to be a star performer, through iTunes, app and iCloud storage sales. “We think [revenue from] services will continue to grow very briskly,” he said.

Nonetheless, despite their positive response last week, investors are understandably keen for Apple to unearth another big seller, with the iPad and the Watch failing to match the iPhone’s success. Could “Project Titan” – the codename for Apple’s electric car project – be the new smash hit? Or might virtual reality headsets, or some augmented reality product akin to Pokémon Go, prompt a new reason for overnight queues outside Apple stores? Analysts are sceptical. With a billion iPhones sold since the handset’s 2007 release, it is the most successful consumer product ever, generating almost $625bn (£475bn) in revenues in just nine years. Apple will struggle to come up with a concept or a category that matches the iPhone – what other hi-tech product could you potentially sell to everyone in the world?

There are 2.5 billion smartphone users around the world, calculates Benedict Evans, an analyst at venture capital firm Andreessen Horowitz. That will rise to 5 billion over time. He estimates there are 630 million iPhones in use worldwide, and another 250 million iPads; outside China, there are about 1.35 billion phones made by the likes of Samsung and HTC that use Google’s Android system as well as 175 million Android tablets. Inside China, about 450 million phones and 200 million tablets use Android software – albeit without access to the Google search engine.

“Both Apple and Android have sufficient scale for their [smartphone] ecosystems to be viable,” Evans notes. “No one else does.”

The likely buyers of the next 2.5 billion smartphones will not be typical iPhone customers. “Most of these people are in emerging markets, and most will be buying phones for under $50 and certainly under $100,” says Evans. In other words, the high-value users Apple has always targeted have mostly been picked off. Any future growth will come from those on comparatively lower incomes in emerging market countries, and “switchers” from Android.

But with so many iPhones in use, the combination of replacement sales, adjunct sales (such as its Watch, which currently needs an iPhone to function) and services – its newest focus – has enough momentum to keep Apple profitable. Cook’s reference to services is part of the company’s new narrative, where its future profits come from users buying a mix of hardware upgrades and content of some sort, such as apps, music or TV shows. The latter will include James Corden’s Carpool Karaoke, after Apple bought a distribution licence for the viral smash hit from CBS. That won’t make the stock rocket, but former stock analyst Neil Cybart, whose Above Avalon consultancy focuses on Apple, says the character of the people and institutions owning its shares has changed.

Facebook Twitter Pinterest Fears over Apple’s prospects in China caused Carl Icahn to bale out of the stock. Photograph: Bobby Yip/Reuters

Apple used to be a “growth stock”: its price rose in a long bull run, beginning when Steve Jobs rejoined in 1997, through to a trough in June 2013 of $56, to what looks like a final peak of $130 in May 2015. Since then, says Cybart, the growth buyers have been replaced by value investors who want a reliable dividend, not a rollercoaster ride. Writing ahead of last week’s results, he called it an “expectations reset”, and suggested: “One sign that a company’s expectations have truly been reset [with Wall Street] is that company’s stock price increases on negative news.” That duly happened.

Two notable stockholders exemplify this shift. The first is Carl Icahn, an activist investor. He bought into Apple in 2012, repeatedly suggested the stock was worth double its price, then sold all his Apple stock in April, citing fears about China after Apple’s earnings fell.

The second investor is Warren Buffett, renowned for being uninterested in tech stocks, but very interested in solid long-term returns. A month after Icahn dumped his holding, Buffett’s Berkshire Hathaway bought a $1bn stake in Apple. Buffett sees Apple as a reliable cash machine through its dividend, which it began paying in 2012.

And the dividend is attractive, as long as you don’t think that the iPhone maker is about to fade away – which, as Evans points out, is probably a safe bet. Richard Windsor, formerly of Nomura Research and now running his own Radio Free Mobile consultancy, says it is simpler to think of Apple stock not as equity, but a bond – paying a return (through its dividend) on the investment of buying it.

“Apple is unlikely to see much in the way of growth but it is continuing to distance its ecosystem from Google’s,” he noted last week. “This gives me confidence that its superb profitability and cashflow are likely to remain intact for some time to come.”

He points out that Apple’s dividend is currently running at $52bn a year; that gives it an effective yield of 9.8% per annum on what is seen as a low-risk stock. Over the past quarter the yield has remained above 2% and dividends are paid quarterly. Of course, unlike a bond, there is no guarantee either of getting the capital invested in the shares back, or of a regular payout. But, Windsor points out: “For those that are not worried about capital growth, this is a no-brainer. Most companies with bonds yielding 10% are highly distressed.”

Apple, however, is not in distress – though Cook must hope that this autumn’s phone releases regain momentum, alongside new versions of the Watch, iPad Pro and Mac computers. Revenues will probably never hit the heights of 2014 again. But when he visits the studios of Apple’s design chief Jonathan Ive to see the latest car mock-up, Cook won’t have to worry where the company’s next billion is coming from. We have reached peak iPhone, but it will remain a money-spinner for some time yet.

WHAT’S ON THE WAY?

After the blockbuster hits of the iPod, iPhone and iPad, what lurks in Apple’s laboratories and design studios that could revive its success in hardware? Nobody outside Apple is certain – the company is notoriously secretive – but its hirings and patent filings give strong clues.

Virtual reality

Headsets that immerse the user in video and audio may be the next big thing. Facebook spent $2bn on the company behind the pioneering Oculus virtual reality headsets, and other technology companies are investing in the concept heavily.

Tim Cook has called VR “really cool” and patents have been filed – but any future product might depend on how the broader market develops.

Augmented reality

Superimposing virtual data on to real scenes, or augmented reality, is the concept behind the Pokémon Go craze. Microsoft and Google are working on their own forms, and Cook talked it up in the latest earnings call. Future iPhones could form the basis for an Apple AR push.

TV content and channels

Apple has bought distribution rights from CBS to James Corden’s hugely popular Carpool Karaoke, where celebrities such as Adele join the chatshow host for in-car singalongs, which will be distributed through its Apple Music service. It is also seeking would-be participants for a reality show entitled Planet of the Apps.

Such moves suggest that Apple will launch its own TV service through its Apple TV set-top box, based on a bundle of shows cherry-picked from major channels.

Cars

Documents and hirings clearly show that Apple is working on a car under the codename of Project Titan. Electric? Surely. Self-driving? Perhaps. The timescale is uncertain, but the company recently brought back Bob Mansfield, the manager behind products like the iMac, iPad and Watch to oversee Titan.

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