Business Technology

Sunday 17 February 2019

Adrian Weckler: 'No, Apple's iPhone isn't doomed'

A man uses a smartphone outside an Apple store in Beijing last week
A man uses a smartphone outside an Apple store in Beijing last week
Adrian Weckler

Adrian Weckler

Apple is doomed. Again. Or so one might think reading headlines and hot takes in the past 72 hours. "Apple shares plunge after downgrade shock," screamed the Guardian. "Apple's reign may be over," predicted the Telegraph. "The beginning of the end?" asked ZDNet.

And so on.

It was because the company pre-announced lower-than-expected iPhone sales for the 2018 Christmas quarter.

Apple CEO Tim Cook blamed a weak Chinese economy and fewer smartphone upgrades.

Critics took aim, blaming the cost of new iPhones, which go up to €1,600.

Other analysts looked at lengthening upgrade cycles, attributed to higher-quality smartphones that simply last longer these days.

Because it's Apple and the iPhone, everyone got a little excited at the numbers: $84bn in revenue for the last three months of 2018 instead of the $89bn to $93bn previously projected by Apple.

Some completely lost the run of themselves. "Apple expects to lose $9bn in Q1," said The Next Web in its story headline, completely missing the point of the fiscal statement.

The markets reacted with a degree of shock, cutting Apple's value by 9pc (or around $70bn) in a single day.

It means that any investor who bought Apple at its peak in early October, when it was worth $1.16trn, has now seen the value of the share decline by 40pc. It has gone from the most valuable company to the fourth most valuable firm in that period.

But just like people proclaiming Twitter to be on life support three years ago, or Microsoft to be 'over' five years ago, there's an air of unreality about the idea that Apple now faces some sort of terminal decline.

Just look at those figures again.

Apple says it will have an $84bn quarter, $7bn less than it was previously guiding, but higher than any other quarter in its history.

In other words, it would be Apple's second most profitable trading period ever, with a profit of close to $2bn per week.

'Ah,' says Wall Street. 'But it's the principle of softening demand and Apple's future prospects that counts here.'

Absolutely. And that's why a proper examination of Apple's products and services yields a very different picture to the one on business wires over the last week.

For example, Cook suggests that iPhone sales are likely to be down.

But growth in some of Apple's other businesses is soaring. This is surely being under acknowledged.

Take Apple's Watch. Research last week suggests that this is now a $4bn business on its own, which would make it bigger than the iPod at its height.

The company's Airpods look like they're not far behind. Analysts expect Apple to sell around 50m of the small wireless earbuds this year, up from around 15m in 2018 and rising to 100m in 2020. Some 50m AirPods would gross between $5bn and $7bn for Apple this year. In other words, Apple may shortly notch up an extra $10bn in sales from two new products it didn't have a few years back.

How many people realise that?

Do financial pundits even know about the Watch and AirPods?

I ask this because so many of them loudly wonder where Apple's new products will come from. Is it possible they don't pay attention to what is actually selling in shops right now?

Now, a fair question to ask might be: will the rise of these products match any fall in iPhone sales over the next couple of years? Honestly, we don't know. (We also don't know whether iPhone sales won't rebound.) But does that naturally lead to a holding position that Apple is semi-doomed? Hardly.

Even if one disregards the physical gadgets, the company still has some solid growth in other areas that isn't being talked about.

The noted Asymco analyst, Horace Dediu, reckons that Apple now has just over 1.4bn active devices, some 100m more than Apple last reported in early 2018. So the company's installed base of active devices is now at a record high and still growing.

Why is that important? Services. Apple has a growing services business, led by the likes of Apple Music, iCloud, iTunes and the App Store. The bigger the installed device base, the more money the company generates from this source.

And that is starting to yield significant cash.

Last week, for example, Apple announced that its App Store saw the highest levels of spending over the Christmas period - $1.2bn in the week between Christmas Eve and New Year's Eve and over $300m on New Year's Day, a new one-day record.

This is very likely to keep growing, regardless of whether iPhone handset growth stalls or not.

Online services are still at an early stage, as companies like Amazon, Google, Netflix and Spotify are showing. The upside is massive.

And if you develop and control decent services that are optimised for use on a 1.4bn installation base, that puts you in a very strong position going forward.

'Ah yes,' say the Wall Street marketeers. 'But look at what's happened to Apple's share price! There's obviously a big problem!'

It's possible. But it's not clear from the analysis we got last week.

There's a scene in Oliver Stone's 1987 film Wall Street where the veteran trader Lou Mannheim (played by Hal Holbrook) takes a young Bud Fox (Charlie Sheen) aside to give him some advice about investing.

"Stick to the fundamentals," Holbrook's character says. "That's how IBM and Hilton were built. Good things, sometimes, take time."

Leaving aside the IBM comparison, it seems to be a point worth considering.

Go back and look at Apple's fundamentals. It suggests a slightly better picture.

Sunday Indo Business

Also in Business