Since September, Apple’s stock price has declined by 40%, wiping out hundreds of billions of dollars in shareholder value and costing the tech giant the title of world’s largest firm by market capitalization, a distinction that once again belongs to energy giant ExxonMobil. Last week, Apple shares fell below $400 for the first time since December 2011 after one of its key chip suppliers delivered a downbeat forecast.
Apple delivered its quarterly earnings report yesterday after the stock market closed, and for the company faithful, there wasn’t much to cheer; Apple shares ended flat in after-hours trading. But let’s be clear: Apple’s recent stock swoon is, in part, a function of the company’s own astounding success over the past few years. On Tuesday, Apple reported earnings results that would cause any other firm to jump for joy: it generated nearly $100 billion in sales over the past two quarters, and now makes more profit each quarter than archrival Google generates in revenue.
Let’s break Apple’s report down into a few themes:
The Long Summer Ahead: In less than a year, Apple has gone from being a high-flying growth stock, which means that investors believe revenue and profit growth will outpace the broader market, to being a so-called value stock, which means that investors think it’s trading for less than its fundamental value. Indeed, Apple is currently trading at slightly more than nine times earnings, which is cheap compared with the rest of the market. Warren Buffett, the world’s most famous value investor, could very well be thinking about taking a bite. And, in fact, the Oracle of Omaha sounded fairly interested in Apple just last month.
Even Apple CEO Tim Cook acknowledges that the company’s growth rate is declining, as he told analysts on Monday. Cook’s mentor, the late Steve Jobs, revolutionized several industries with a string of category-busting devices, from the iPod to the iPhone to the iPad. Apple optimists insist that the next breakthrough product is in the works, and suggest that the company could be planning a new television device that will revolutionize our living rooms, or perhaps a high-tech watch. But on Tuesday, Cook repeatedly said though the company has big plans for new products, they will not appear at least until the fall. Apple likes surprises so this could be a head fake — but Cook seemed pretty emphatic in saying there will be no new big product announcements until the fall.
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A Question of Identity: One of the key metrics investors watch is gross profit margin — basically, how much Apple clears on each device it sells. During its peak, Apple reported astounding profit margins of over 40%. Now, Apple’s gross profit margin is declining. Meanwhile, the company’s rivals, including Samsung and HTC, are attracting millions of consumers with lower-priced, Android-based smartphones and tablets. This competition is putting pricing pressure on Apple.
Apple turbocharged the smartphone revolution with the iPhone, so it was able to demand a premium for what was clearly a superior product. The question now is whether Apple will have to lower its prices, as lower-priced competitors flood the market. Apple could certainly sell more phones at a lower cost, if it wanted to, to make up the difference from its declining profit margins. But that would be a risky move, because if Apple goes down-market, it risks muddying its previous competitive advantage as the premium gadgetmaker in the world.
In other words, buried in the technical talk of gross profit margins is a corporate-identity crisis: Is Apple still Apple if its products aren’t distinctly better (and more expensive) than the competition? What happens if smartphones and tablets all begin to look and feel the same?
Cash Back: On Tuesday, Cook announced that the company plans to return a whopping $100 billion to shareholders by the end of 2015. This decision appears intended to appease certain Wall Street shareholders, like hedge-fund titan David Einhorn, who’s been agitating for Apple to pass back some of its profit hoard to investors — who, after all, own the company. Apple plans to spend millions to buy back its own stock and will also increase the dividend it pays to shareholders. The question on Wall Street is whether this financial jujitsu will have any appreciable impact on the company’s flagging stock price. Traditionally, stock buybacks have been viewed as a vote of confidence by management. In this case, Apple’s decision carries the faint whiff of fear.
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Creative Accounting: Investors like Einhorn understandably focus on Apple’s immense cash hoard, which now stands at a mind-boggling $145 billion. But there’s a problem. Much of that cash is in overseas banks, because Apple does over half of its business outside the U.S. Bringing that money back to the U.S. would entail a gargantuan tax bill, in the tens of billions of dollars. So believe it or not, rather than doing that, Apple — the richest tech company in the world — says it plans to borrow money in the credit markets. This may seem baffling to regular people like you and me, but it’s actually cheaper for Apple to borrow money in the U.S. than to bring its billions back onshore and pay taxes on it.
Tim’s Test: It’s difficult to imagine what Cook is going through right now. His mentor, Jobs, is widely considered to be a visionary on par with the greatest business leaders in American corporate history. Jobs is irreplaceable, and Cook, a humble and brilliant operational wizard, knows that. The question is whether Cook can guide the company into the next phase of the company’s existence. He’s facing a host of challenges heading into the next quarter. Slowing growth, reduced margins, increasing competition. Apple remains the most profitable tech company in the world, but with no new products in sight, it could be a very long summer for Apple fans.