TECHNOLOGY SPECTATOR: Welcome to Apple's new normal

Logic says Apple's growth has to slow at some point. That doesn't mean the giant's doomed, only that it's become like any other company.

Technology Spectator

It is only four months ago that economists were predicting the launch of the iPhone 5 would single-handedly boost the US economy by up to half a percentage point.

Today, technology analysts are wondering if Apple can increase its own earnings at all this year, never mind rescue the American economy.

Steven Milunovich, analyst at UBS, talks about a "lost year of growth” at Apple in 2013, while Stuart Jeffrey of Nomura forecasts a rise of just 2 per cent in earnings this year, "which, if true, suggests that Apple really has gone ex-growth”.

For a company that posted year-on-year revenue growth of 73 per cent a year ago, even analysts’ more generous responses to Wednesday’s results sound like damning with faint praise.

"We view the results as a sign that Apple is executing well as they shift to a more normal growth company,” wrote Amit Daryanani of RBC Capital Markets.

When dealing with the world’s largest company, logic suggests that growth has to slow at some point.

Benedict Evans, a London-based smartphone analyst with Enders Analysis, points to the "Catch-22” situation in which Apple finds itself, where high sales create fears of market saturation and low sales suggest slowing growth. "Apple has got to the point where all news is bad news,” he says.

Silicon Valley technologists love to scoff at Wall Street’s narrative that a more "normal” Apple is somehow "doomed”, pointing to Apple’s record sales of iPhones and iPads, and one of the biggest quarterly profits in American corporate history.

Shipping 47.8m iPhones in the three months leading up to Christmas 2012 certainly puts Samsung’s 40 million Galaxy S3 sales, over more than six months, in the shade. Demand for the iPad mini was so great that Apple could not make them fast enough, despite many critics suggesting its $130 premium to rivals such as Amazon’s Kindle Fire would put off shoppers.

"We obviously could have sold more than this because we could not build enough iPad minis to come into demand balance,” said Tim Cook, Apple’s chief executive.

However, despite Cook’s reputation for mastery of the supply chain, updating almost every Apple product simultaneously has taken its toll on profit margins.

As Wall Street analysts grapple with Apple’s guidance of lower margins and revenues in the second quarter, many are coming to terms with the fact that it might struggle to make up the flat and declining earnings likely to come from the first half of the year.

The top end of Apple’s guidance implies a 17 per cent decline in earnings year on year, says Walter Piecyk of BTIG Research, while the worst case suggests a 25 per cent contraction.

"Not only are earnings going to go down for the first time in a decade, they are going down 17 to 25 per cent,” he says. "That’s kind of scary.”

Fewer and fewer analysts now expect Apple's share price to return to its $700 peak for the foreseeable future.

"We believe a capitulation process is under way,” said Ben Reitzes of Barclays. "And, while painful, it is healthy since the loftiest expectations should be reined in quite a bit.”

Although acknowledging that "this recent sell-off and Apple’s execution of late has tested our patience”, Reitzes said that a "bevy” of new products later this year should put the spring back into Apple’s step.

Despite growing speculation of a new Apple TV set or cheaper iPhone, Cook gave few hints as to what those new products might be. He did suggest that it was unlikely to be a "phablet”, a combination phone and tablet that Samsung helped to popularise with its Galaxy Note.

"We put a lot of thinking into screen size,” Cook said when asked about the iPhone’s smaller size than many rivals, "and we believe we have picked the right one.”

But the TV market remains an "area of intense interest”. Apple’s current TV product, a $99 set-top box, sold 2 million units last quarter, up 60 per cent. "What was a small niche, at one time, of people that loved it, is [now] a much larger number of people that love it,” he said. "We continue to pull the string and see where it leads us.”

Nor did Cook dismiss the idea of a cheaper iPhone altogether. The two-year-old iPhone 4 sold so well that Apple’s manufacturing could not keep up with demand, he said – which might suggest the device, available for free with a long-term contract in many markets, can in effect be a cheaper iPhone without the need for a new product.

"We aren’t interested in revenue for revenue’s sake,” Cook said when asked whether market share was important. "We want to make only the best products.”

But he added: "I think we have had a great track record here on the iPod at doing different products at different price points and getting reasonable share from doing that.”

Cook also seems to be unconcerned that sales of the higher-priced iPhone would be replaced or "cannibalised” by a cheaper device, as has started to happen with the iPad mini.

"I see cannibalisation as a huge opportunity for us,” he told analysts. "Our base philosophy is never to fear cannibalisation – if we do, someone else will just cannibalise us.”

That suggests that Cook’s Apple is unlikely to settle for being a safe, steady, slow-growth income stock.

As one Apple software engineer tweeted after Wednesday’s results and the accompanying plunge in stock price: "Feels good to be the underdog again.”

Copyright the Financial Times 2012.

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