I'd like to show you a classic S-curve chart. You know... the kind where a sleepy business suddenly takes off like a rocket for a short time, and then the hypergrowth segues into the next slow-growth plateau.
This one's a picture of Apple (AAPL 0.45%), taken with a 10-year exposure. (Where can you find a camera like that?) I'm using trailing 12-month (TTM) figures in order to smooth out seasonal effects, and provide a clearer view of long-term trends.
AAPL Revenue TTM data by YCharts.
You can clearly see where the iPhone/iPad killer duo gained game-changing traction in 2010, sparking a three-year cycle of massive growth on every metric that matters. But then, the scary second curve of the familiar S shape came along. Profits and cash flows flattened out first, and then revenues followed suit.
The lag between the sales and profit curves will make more sense when you take this margin profile into account:
AAPL Gross Profit Margin TTM data by YCharts
Apple's incredibly efficient operations, paired with exploding economies of scale, kept the profits rising way faster than sales for many years, stretching back to the iPod era. But the magic wore off in 2012, when the iPhone 5 and the non-Retina iPad Mini came along.
Above all else, the lower-margin Mini cut into sales of the extremely profitable full-sized iPad line. So, Apple's unit sales continued to soar, with very healthy revenues to follow; but the take-home profits started dwindling.
Is this the end of Apple's extreme growth as we know it? Maybe not.
The charts will soon see another update, as Apple is due to report first-quarter earnings in less than two weeks. Cupertino introduced two new iPhone models in this quarter, and at least one of them is selling faster than Apple can build it. To Apple's relief, the hot-selling model happens to be the high-end 5S model, which has more new features and higher profit margins.
Time for another rocket boost?
Three months ago, Apple said that first-quarter gross margins should stay largely flat, at roughly 37%. The target range for top-line sales stretched from a 6% year-over-year drop to a 3% rise. Analysts are leaning toward the top end of that revenue range.
In light of the iPhone 5C and 5S release, I would agree with the mildly optimistic revenue view, and pin gross margins at -- or maybe even above -- the top end of Apple's guidance.
If I'm right, the scary flat end of the revenue S-curve would make a tiny bend to the north again -- just in time for the upcoming holiday season, and an expected iPad update to reaccelerate that chart line, again.
What about the margins?
The margin curves wouldn't bend back quite as much, and I really don't expect much of a bounce in the long term, either. Apple's fabulously profitable operations have to come to terms with low margins in potential high-volume markets like China, not to mention the looming end of carrier subsidies.
T-Mobile (TMUS -1.21%) has already done away with consumer rebates for long-term contracts, and this is a market where smaller players often lead the way in consumer-facing innovation.
AT&T (T 1.21%) and Verizon (VZ 1.19%) have already taken baby steps in T-Mobile's direction. Verizon already offers unsubsidized iPhones with a two-year payment plan, but it's just one option, and not the default model. AT&T places its full-priced option more front and center but, again, it's not the only option. I would not be surprised to see Apple subsidies falling entirely by the wayside sometime in 2014. That's a helping of sustained margin pressure for Apple.
In other words, Apple may have to sacrifice its juicy margins to kick the end of the S-curve further away. That classic-looking chart is about to turn downright unconventional.
