Credit: Apple Inc.

Do we expect too much from Apple?

Despite a record third quarter, the tech giant's share price tumbles as investors fear it's passed its peak.

by Adam Gale
Last Updated: 28 Aug 2015

No company suffers the burden of expectations quite as much as Apple, but that’s the price it pays for repeatedly getting the world’s geeks drooling with sector-redefining gadgets. Still, it’s got to sting when you announce a 39% rise in quarterly profits to a staggering $10.7bn (£7.6bn) and your share price promptly tanks.

Apple shares dropped nearly 9% in after-hours trading on the back of its results for the three months to June 27, before recovering most of the losses. At first glance, it’s hard to guess what upset investors so much. Was it that revenues only rose 33% to $49.6bn (a record for the third quarter), or that iPhone sales only increased 35% to 48.8 million units?

Despite Apple’s successes, analysts had expected more. It raises the question of whether the firm’s recent resurgence on the back of the iPhone 6 masks a deeper, underlying problem.

In the furious pace of the consumer electronics business, you’re only as good as your last product. Under Steve Jobs, Apple stayed ahead of the pack by releasing a rapid succession of game-changing devices (iPod, iPhone and iPad), effectively creating new sectors in which to expand. But such levels of innovation were never sustainable, even had Jobs lived.

Now, people are looking for new boss Tim Cook to deliver the same with the Apple Watch (and, possibly, an Apple car…). It’s hard to know exactly how well the smart watch has done – Apple only said that it had outsold the iPhone or iPad in their first quarters, which means it must be over 3.2 million units.

That might sound good, but with numbers almost certainly less than a tenth of iPhone 6 sales, it’s not exactly transforming the business so far. The really telling thing will be to look at how long the tail is once the hype has died down. Was this only ever going to appeal to tech heads, or will people inevitably convert to the smart watch as to the smartphone? The jury’s out.

If Apple can’t expand into new categories of product, then it will find it hard to grow in its traditional markets like the US and Europe, which are already saturated with smartphones and, it’s becoming increasingly clear from steadily declining iPad sales, tablets. People already have one, they just get a newer, better one every couple of years.

In that context, Apple can have success stories – the iPhone 6 being one – but it can’t easily grab much more of the market in the long term. The iPhone’s simplicity comes at the expense of Android’s flexibility; the iPhone’s exclusivity comes at the expense of the lower end of the market.

That really leaves expansion into new countries. In this area, the company’s still doing well. Revenues in China doubled to $13.2bn as the iPhone takes off. Fears of that country’s slowdown are misguided. It’s still growing at 7% a year – so long as there’s not a ‘hard landing’, China should continue to boost Apple’s results.

‘We would be foolish to change our plans,’ Cook said of Apple’s investment in expanding into the country.

Apple still has an awful lot going for it, and with its resources and the strength of its brand, it’s likely to hold onto its position as market leader for some considerable time. If anyone expects it to pull of the magic tricks of the 2000s again, however, they are likely to be disappointed.

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