ADVERTISEMENT

Apple CEO Tim Cook

Jeff Chiu, Associated Press

CEO Tim Cook plays Apple's cash card

  • Article by: The Economist
  • April 28, 2013 - 11:29 AM

 

There was no timetable for an iWatch or for an iTV.

There was, however, the promise of perhaps the biggest share buyback in American corporate history. Announcing Apple’s results for the first three months of 2013 on Tuesday, CEO Tim Cook stayed mum about its product pipeline, saying only that the firm was working on some “amazing new hardware, software and services” to be rolled out later this year and in 2014. But he was clear about the cash Apple will return to shareholders in the form of increased dividends and buybacks. Altogether, it plans to fork out $100 billion by the end of 2015.

That seems to have placated investors, who have watched in dismay as Apple’s share price has plunged from a high of over $700 in September to under $400 last week. On Friday, the firm’s shares closed at $417.20.

Cook bought himself some breathing space by raising planned share buybacks from $10 billion to $60 billion and increasing dividends by 15 percent. However, he still needs to produce new blockbuster offerings to bolster future growth. Ever since he replaced Steve Jobs at Apple’s helm, speculation has mounted that the company has lost some of the magic that produced the iPhone and iPad.

Cook’s fans protest that those who think Apple should already have come up with a new category-killer are being unrealistic. A few years between big ideas is nothing to worry about. And they note that the iPad and the iPhone are still minting money. In the first quarter of 2013 Apple reported revenue of $43.6 billion, an 11 percent increase compared with the same period in 2012, and a figure that exceeds the combined sales of Google and Microsoft.

But Apple’s margins are being squeezed by the introduction of the iPad mini, which is less lucrative than bigger iPads. In its latest quarter the firm’s gross margin shrank year-on-year, from 47.4 percent to 37.5 percent, and its quarterly net profit dropped for the first time in 10 years, from $11.6 billion to $9.5 billion.

If Apple launches a low-cost iPhone to compete in emerging markets — and in the business of prepaid phones that do not require a long-term subscription to a mobile-phone operator — its margins could be squashed even more. That could put additional pressure on its share price. Ben Reitzes of Barclays bank reckons that every percentage-point decline in Apple’s gross margin equates to a drop of $1.40 in earnings per share.

Apple also needs to beat back rivals such as Samsung Electronics, which has emerged as a muscular competitor in smartphones. Investors particularly want to see Apple respond to the rise of “phablets” — phones whose screens are bigger than those of most smartphones, though not as big as a tablet’s.

Even if Apple keeps expanding its phone and tablet businesses, it still will have to keep inventing new products. The firm is rumored to be working on a smart watch and a smart TV with associated apps. It is also looking at mobile payments. With 435 million customers already registered at its iTunes store, which celebrated its 10th birthday Sunday, it has a head start.

New offerings in these areas could well be among the “amazing” things Cook was alluding to. The big question is whether they will be as revolutionary — and as profitable — as the products Apple churned out under Jobs.

Cook has played his cash card. Now he needs to turn up trumps on the innovation front, too.

© 2014 Star Tribune