Has Apple peaked?

  • Article by: THE ECONOMIST
  • Updated: January 27, 2013 - 1:00 PM
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Apple headquarters in Cupertino, Calif.

Photo: Paul Sakuma, Associated Press - Ap

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Tech blogs are abuzz. Pundits are busy pumping out predictions. The company that makes the new device that's attracting so much attention is teasing reporters by being coy about its innovative features.

Apple's product launches are always like this, but this time the fuss is not about an Apple product. It is about Samsung's latest Galaxy smartphone, which is likely to be launched in March.

Stiffer competition in smartphones and tablets, from the likes of Samsung, has spooked investors in Apple. They got another fright Wednesday when the firm revealed that its latest quarterly profit of $13 billion was flat because of higher manufacturing costs. That triggered a rout in after-hours trading: At one point some $57 billion was wiped off Apple's market capitalization, roughly the equivalent of the entire value of Ford.

Apple's shares have been mauled by bears many times before but always have recovered. The big question on many investors' minds is whether the firm can rebound again. Two things have whetted the bears' appetites.

First, Steve Jobs, Apple's founder and creative genius, is dead. The iPhones and iPads he sired still generate gargantuan profits, but his successor, Tim Cook, has yet to prove himself capable of bringing new breakthrough products to market.

Second, Apple's fantastic profit margins -- 38.6 percent on sales of $55 billion -- attract competitors like candy stores attract 6-year-olds.

The company's fans pooh-pooh the idea that Apple has peaked. The firm's price-earnings ratio, 11.6, is not much different from Microsoft's. That makes Apple's shares look relatively sexy. Unlike Microsoft, which depends heavily on the ailing personal-computer business, Apple concentrates on sectors that are growing fast, such as smartphones and tablets.

One of those gadgets is likely to be a much-cheaper iPhone aimed at emerging markets. In China, Apple sold 2 million of its iPhone 5s during its launch last month, but most Chinese shoppers can't afford the things. Barclays, an investment bank, reckons that Apple could produce an iPhone for less than $150 to broaden its appeal.

The firm has played down reports of a cheaper iPhone, but Apple-watchers expect an announcement this year. Slimmer profit margins in China and India may be worth it to woo millions of new buyers. Apple is said to be close to a distribution agreement with China Mobile, a carrier with a hefty 700 million subscribers.

The best way for the company to prove that it is not past its prime, however, would be for it to disrupt another big market. Since Jobs' death in 2011, Apple has concentrated on sprucing up its existing products. Now investors want to see it conjure up entirely new ones.

All eyes are on television, though Apple is also exploring the potential of other markets, such as wearable computing. Cook says that TV is an area of "intense interest." Expectations are that Apple will launch an iTV later this year.

Skeptics point out that plenty of elegant, thin screens already are on sale. Moreover, Apple's existing set-top box, which lets users play content from iTunes, Netflix and other services on their televisions, has not been a stunning success.

But this misses the bigger picture. The iTV, which may be controlled via gestures and voice commands as well as via iPads and iPhones, could be a digital hub. Peter Misek of the investment bank Jefferies says that iTV sales also should boost purchases of iPads and other Apple gear, as more people get sucked into the firm's "ecosystem" of linked devices and software.

The iTV is no surefire blockbuster, though. For one thing, persuading cable and broadcast outfits to make programming available on demand via the Internet will be tricky. For another, iTVs are likely to be pretty expensive, limiting their mass-market appeal.

Apple will also face stiff competition from Samsung. Apple's court battles with the South Korean firm over smartphone patents have reinforced the impression that it is on the defensive.

Apple may dip into its $137 billion cash lake to boost its share price by paying fatter dividends or buying back more stock. That would delight some investors, but others would see it as a tacit admission that the firm's great innovation engine has stalled.

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