Apple (NASDAQ:AAPL) is one of the richest public companies on the planet. It has nearly $250 billion in cash and equivalents on its balance sheet, and no other company came close to the $59.5 billion in profits it made last year. In fact, only 53 U.S. companies had revenues that high in 2017.
Much of that success can be attributed to one thing: the iPhone. It's the most successful invention in history, at least from a business perspective. Apple's popular smartphone generates the overwhelming majority of the company's revenue and profits, and indirectly fuels much of the rest of its business (including services it offers and wearables that pair with the iPhone like Airpods and the Apple Watch).
Check out the latest Apple earnings call transcript.
In little more than a decade, iPhones (and copycat Android devices) have become ubiquitous in the developed world. That success, though, has created a problem for the tech titan.
There's little room for iPhone sales growth anymore. After 12 years of evolution, the changes brought by each new iteration of the device have become so incremental that they are virtually meaningless. This has led to longer upgrade cycles which, in turn, has led to iPhone sales actually declining year over year from their recent peak. Customers see little need to buy new ones.
Last week, Apple reported its first quarter of declining revenue and profits in years: Revenue fell 5%, largely due to a 15% drop in iPhone sales. Net income fell slightly as well, though earnings per share rose due to the company's stock buybacks. Weakness in China was cited as the reason for the fall in iPhone sales, but there are signs of consumer fatigue for the flagship product around the world. One sign: Apple seems to think its best strategy for squeezing more revenue out of the iPhone is to raise prices.
Do these latest numbers indicate the company has peaked?
The next big thing
The shoulder of the information superhighway is littered with once-great tech companies that skidded off the road. Sony, with the Walkman and the Trinitron television, dominated consumer electronics in the late 20th century. Now it's considered a bit player. Palm, the maker of the Palm Pilot, had the early lead in PDAs, the forerunners to the smartphone, but has since been left in the dust. Blackberry beat Apple to the smartphone market, but was neutered by the iPhone.
Investors, industry observers, and consumers have been waiting for years for Apple to surprise the world, either by introducing the next big thing, or by making a big acquisition that would allow it to reinvent a new business.
However, in the Tim Cook-era (which began in 2011), the only significant new products Apple has launched are Airpods and the Apple Watch. While both products have found an audience, they are mostly complementary products to the iPhone. Neither qualifies as the type of standalone, breakthrough invention that the iPod, iPhone, or even the iPad were. And Apple's Other Products segment, which includes Apple TV, the Homepod, Airpods, and the Apple Watch, barely made 10% of the revenue that the iPhone brought in last year.
Instead of developing new hardware, Tim Cook's Apple has largely focused on developing its Services segment. It launched Apple Music, which emerged from the acquisition of Beats Electronics, created Apple Pay, and grew its App Store business. All these services are tied closely to the iPhone.
While Apple has focused on service, it has fallen behind in other fast-growing corners of tech. It came early to the voice-activated technology party with Siri, but its virtual assistant has since fallen behind Amazon's Alexa. Its Homepod smart speaker is far less popular than either the Amazon Echo line or the Google Home. While Apple has the iCloud, its own proprietary cloud ecosystem that stores users photos, contacts, mail, and other data, it passed up its opportunity to build the type of enterprise cloud business that has brought billions in profits to rivals like Amazon and Microsoft.
At the same time, Apple has had a number of false starts in the areas where it was looking to make a splash. It has little to show for its years of efforts developing a smart television segment, and the biggest recent news regarding its autonomous vehicle effort has been a round of layoffs at Project Titan.
Pundits have long speculated that the iPhone-maker could buy Tesla or Netflix -- moves that would instantly catapult it into a leadership position in electric cars or video streaming, respectively. Thus far, the company has shown no visible signs that it was working toward any such significant acquisition.
Out of ideas
Rather than make a big acquisition or develop a breakthrough technology, Apple has largely spent its profits on share buybacks. In fiscal 2018, it repurchased a whopping $72.7 billion worth of shares. Apple could have bought Tesla with that money and still had $21 billion left over.
Over the last six years, it's spent $238.4 billion on share buybacks and an additional $71.9 billion on dividends. There are only a baker's dozen or so public companies on Earth that it couldn't have acquired with that bankroll.
There's nothing necessarily wrong with share buybacks. Indeed, plenty of investors have clamored for more of them. But the strategy doesn't suit a tech company with the visionary label of Apple and the imprint of Steve Jobs. Notably, Jobs refused to allow Apple to pay a dividend or buy back shares when he was running the company.
The real problem with share repurchases is that, while they are a way for management to disperse profits, they do nothing to improve the underlying business. CEO Cook is not justifying the millions he gets each year to be a strategic leader if all he can advocate is buying back company stock.
Apple is investing in research and development -- it spent $54.4 billion on R&D over the last six years. But it has little to show for those outlays in the way of new products. Its secretive autonomous vehicle unit appears to be way behind those of competitors like Alphabet, Uber, and Tesla. And though it has the hardware and installed device base to give it an advantage in video streaming, it has been unable to gain any traction in that business.
The tragedy of Apple, then, seems to be that the company, with its bountiful balance sheet and culture of invention, is not living up to its reputation. Apple is in a great position to produce the next breakthrough consumer technology, whether that's in autonomous vehicles, augmented/virtual reality, drones, or whatever. But instead, management seems largely content to return its profits to shareholders and juice the stock price.
Borrowing the idea from another corporation's iconic leader, Facebook CEO and occasional Tim Cook-combatant Mark Zuckerberg once said, "The biggest risk is not taking risks. ... In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks."
Cook might want to take note. With iPhone sales falling by double-digit percentages, and Apple's overall revenue down, it appears that years of conservatism and risk aversion are catching up with the company. In the tech world, standing still is no way to stay on top.