Apple Inc. Earnings: Where Will the Growth Come From?

On Wednesday, Apple (AAPL -0.91%) will release its quarterly report, and investors have to be nervous in their expectations that the tech giant will produce just about no growth in its fiscal second-quarter revenue and earnings. Even as the iPhone maker keeps holding some key advantages over Google (GOOG 0.50%), Microsoft (MSFT 1.69%), and other players in the mobile-device market, Apple nevertheless has its proponents clamoring for a new, innovative product launch that will do more than simply refresh long-lived franchises that some fear are becoming stale.

Apple's track record of success didn't come without bumps in the road, and in particular, the departure of Steve Jobs back in the mid-1980s led to Apple falling behind some of its tech peers until he returned in the late 1990s. Now, longtime investors fear that Jobs' death means that Apple's growth might never return. Let's take an early look at what's been happening with Apple over the past quarter and what we're likely to see in its report.

Source: Apple.

Stats on Apple

Source: Yahoo! Finance.

Can Apple earnings start moving back up?
In recent months, analysts have cut their views on Apple earnings, slashing their March-quarter estimates by 6% and reducing their full-year fiscal 2014 and 2015 projections by more than $1 per share. The stock has fallen back from its best levels of the year, dropping 3% since mid-January.

Apple's fiscal first-quarter earnings report in January didn't inspire confidence among investors, as the stock dropped 8% following the announcement that Apple had sold far fewer iPhones than most people expected. Even with Apple facing supply constraints on iPhones and iPads during the quarter, the company seemed to catch up with demand by quarter-end, and guidance for revenue for the March quarter fell below analyst projections by 4% to 8%. Moves from telecom providers to clamp down on upgrades took a toll, and even promises of new products later this year didn't help Apple avoid criticism.

Source: Apple.

The main problem that Apple faces is that the proliferation of tablets, smartphones, and other mobile devices that run on operating systems from Google, Microsoft, and other competitors has put immense pressure on Apple's margins. Even though supporters argue that the quality of Apple devices is higher than those of its competitors, even low-end sellers of Android devices have an impact on Apple by driving potential demand for iPhones and iPads to cheaper price points. In response, Apple has lowered prices on older models, and that has contributed to narrower margins that put a lid on overall growth.

One huge advantage that Apple has long held over Microsoft is in security, and that advantage once again showed itself recently in the outbreak of the Heartbleed security breach. By keeping its security protocols on a tight leash among its developers and moving away from the use of OpenSSL, where the breach occurred, Apple dodged the Heartbleed bullet and could benefit from the perception of greater safety from Apple devices compared to those of Google and Microsoft.

Still, what Apple investors really want is a new product, and rumors about a possible iWatch smartwatch have been flying around lately. Yet uncertainty about how Apple could go beyond simply mimicking existing offerings tailored toward athletes and fitness-tracking has some of its advocates nervous about an iWatch, especially given how much pressure Apple is under to deliver a blockbuster.

In the Apple earnings report, watch closely to see how the company anticipates finding new growth opportunities. Without addressing the long-term threat of narrowing margins due to competition, Apple could continue its string of poor share-price performance following disappointing earnings announcements.

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