As the world’s most celebrated technology company, Apple is accustomed to lofty expectations. For years, it consistently exceeded them by introducing one breakthrough product after another. But lately, Apple has occasionally struggled to meet the expectations of Wall Street analysts and some investors. That was evident Monday as Apple reported quarterly earnings that disappointed, sending the company’s stock price tumbling. Slowing growth, increasing competition, and nagging fears over innovation have hung around the company’s neck for months.
Investor concern is being driven by four factors. First, Apple’s growth rate is declining, a fact that company CEO Tim Cook acknowledged last year. Last quarter, Apple reported sales of $57.6 billion, a 5.7% increase from one year ago. But as recently as January 2012, Apple’s sales were skyrocketing by more than 70%. What’s driving the company’s decreasing growth rate? For one thing, sales of the company’s flagship iPhone device are decelerating. Last quarter, Apple sold 51 million iPhones, well below Wall Street expectations of 55 million units. And in North America, iPhone sales actually decreased in 2013, Cook said on a post-report earnings call.
Second, Apple faces intensifying competition in the global smart phone space from Samsung, Huawei, LG and Lenovo, which have brought cheaper models to market, many powered by Google‘s Android operating system. Last year, the iPhone lost a significant percentage of its global market share, according to two new studies released Monday. In 2013, the iPhone accounted for 15.5% of the market, down from 19.4% in 2012, according to research firm Strategy Analytics. Meanwhile, Samsung’s market share increased from 30.4% to 32.3%. Huawei, LG and Lenovo also enjoyed market share gains.
“Apple remains strong in the high-end smartphone segment, but a lack of presence in the low-end category is costing it lost volumes in fast-growing emerging markets such as India,” analysts at Strategy Analytics wrote in their report. For now, Cook is standing firm. “Our objective has always been to make the best, not the most,” he said. “We’re willing to make any product that’s a great product. Where our line in the sand is, it’s making something that’s not fantastic.”
Third, Apple’s financial forecast disappointed Wall Street. For the current quarter, Apple projected revenue between $42 billion and $44 billion, below Wall Street expectations of $46 billion. In fact, if sales do not exceed $43.6 billion, that would amount to Apple’s first quarterly revenue decline since 2003. Again, remember that Apple’s revenue was growing by more than 70% as recently as two years ago.
This trend affects profit as well as revenue. Apple said that last quarter the company earned profit of $13.1 billion, unchanged from 12 months ago. Late last year, Apple reported its first profit decline in a decade. Apple’s disappointing sales outlook has raised fears that the company’s highly touted deal with China Mobile may not deliver the sales boost that Wall Street had hoped for.
China presents a once-in-a-lifetime opportunity and challenge for Apple. China Mobile is the world’s largest wireless carrier with 760 million subscribers. To put that in perspective, that’s more than three times the number of U.S. users who subscribe to mobile services offered by AT&T and Verizon Wireless — combined. But early reports suggest that initial iPhone sales in China have been disappointing. Still, there’s reason for hope. It’s worth noting that Apple is currently only selling the iPhone on China Mobile in 16 cities. That’s expected to grow to 300 cities by the end of the year, according to the company.
Fourth, Apple’s relatively tepid earnings report has once again stoked concern about the company’s ability to deliver category-busting new products. Fears over the state of Apple’s famous innovation machine have been mounting steadily since the death of Apple co-founder Steve Jobs in October 2011. This is a highly controversial topic, because Apple has made impressive improvements to its existing product lines, and the iPhone and iPad are considered the gold-standard in their respective categories.
But the fact remains that Apple hasn’t launched an entirely new product since the 2010 debut of the iPad. On the conference call, Cook tried to reassure investors, hinting that new products could appear by the end of 2014, though he wouldn’t offer specifics. “Innovation is deeply embedded in everybody here,” Cook said. “We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus on the very few that deserve all of our energy.”
There is a growing consensus on Wall Street that the company needs new products—like the oft-rumored iWatch wearable device or a new TV product—in order to jumpstart the company’s growth. Cook hinted that the company is looking at a mobile payments system that might allow people to make purchases on their Apple devices. “What we have gotten over the last year or so is impressive products, but they are really enhancements of current products and not necessarily the next new thing,” Jack Ablin, chief investment officer with BMO Private Bank, told Bloomberg. “Apple investors want the next new thing—that’s the catalyst that people are waiting for.”
It’s important to point out that as an absolute matter, Apple continues to post the kind of numbers that should be the envy of the technology world. The sheer scale of Apple’s business is staggering. The company’s market value is nearly half-a-trillion dollars, and it’s sitting on $145 billion in cash. From a technology and design perspective, the iPhone and the iPad remain the industry’s most celebrated devices. Cook is one of the most respected chief executives in corporate America. And, as a turn-around story, there simply never has been nor likely ever will be something like it. But as long as Apple continues to make incremental improvements to existing devices rather than release entirely new products, growth fears will persist. One blockbuster launch could change all that, and 2014 might be the year it happens.