The tragedy of Apple – The Motley Fool



Apple (NASDAQ: AAPL) It is one of the richest public companies on the planet. It has almost $ 250 billion in cash and equivalents in its balance sheet, and no other company came close to the $ 59.5 billion in profits it earned last year. In fact, only 53 US companies had income what high in 2017

Much of that success can be attributed to one thing: the iPhone. It is the most successful invention in history, at least from a business perspective. Apple's popular smartphone generates the vast majority of the company's revenues and profits, and indirectly feeds much of the rest of its business (including the services it offers and portable devices that combine with the iPhone such as Airpods and the Apple Watch. ).

In little more than a decade, iPhones (and Android's copy devices) have become ubiquitous in the developed world. That success, however, has created a problem for the technological titan.

Oversaturation

There is already little room for the growth of iPhone sales. After 12 years of evolution, the changes produced by each new version of the device have become so incremental that they are practically meaningless. This has led to longer update cycles that, in turn, have led to iPhone sales actually decreasing year after year since its most recent peak. Customers see little need to buy new ones.

Apple iPhone

An image of the Apple product event in October 2018 in New York City. Image source: Apple

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 also decreased slightly, although earnings per share increased due to the company's share repurchases. The weakness in China was cited as the reason for the drop in iPhone sales, but there are signs of consumer fatigue for the flagship product worldwide. One sign: Apple seems to think that its best strategy to eliminate more income from the iPhone is to increase prices.

Do these last numbers indicate that the company has reached its peak?

The next big thing

The upper part of the information superhighway is full of large technology companies that went off the road. Sony, with the Walkman and Trinitron television, they dominated consumer electronics at the end of the 20th century. Now he considers himself a little player. Palm, the manufacturer of the Palm Pilot, had the initial leadership in PDA, the precursors of the smartphone, but since then it has remained in the dust. Blackberry beat Apple in the smartphone market, but was neutralized by the iPhone.

Investors, industry watchers and consumers have been waiting for years for Apple to surprise the world, either by presenting the next big thing or by making a major acquisition that would allow it to reinvent a new business.

However, in the era of Tim Cook (which began in 2011), the only major new products that Apple has released are Airpods and Apple Watch. While both products have found an audience, they are mostly complementary products to the iPhone. Neither of them qualifies as the kind of independent and revolutionary invention that was the iPod, the iPhone or even the iPad. And the Other Products segment of Apple, which includes Apple TV, Homepod, Airpods and Apple Watch, barely got 10% of the revenue that the iPhone generated last year.

Instead of developing new hardware, Tim Cook's Apple has focused heavily on developing its Services segment. Launched Apple Music, which emerged from the acquisition of Beats Electronics, created Apple Pay and grew its App Store business. All these services are closely linked to the iPhone.

While Apple has focused on service, it has lagged behind in other corners of fast-growing technology. He arrived early at the voice-activated technology party with Siri, but his virtual badistant has been left behind. From amazon Alexa. Your Homepod smart speaker is much less popular than the Amazon Echo line or the Google home page. While Apple has the iCloud, its own ecosystem in the cloud that stores photos, contacts, mail and other user data, missed the opportunity to develop the type of business in the cloud that has taken billions in profits to rivals like Amazon and Microsoft.

At the same time, Apple has had a series of false starts in the areas where it was looking to make a splash. He has little to show for his years of efforts in the development of a smart TV segment, and the most recent news about his effort of autonomous vehicles has been a series of layoffs in the Titan Project.

Experts have long speculated that the iPhone manufacturer could buy Tesla or Netflix – movements that will instantly catapult you to a leadership position in electric cars or video transmission, respectively. So far, the company has not shown any visible signs that it was working on such a significant acquisition.

Apple CEO Tim Cook on stage

New from Apple. Even more stock buybacks. Image source: Apple

Without ideas

Instead of making a large acquisition or developing an innovative technology, Apple has largely spent its earnings on share repurchases. In fiscal year 2018, he repurchased a whopping $ 72.7 billion in shares. Apple could have bought Tesla with that money and still had $ 21 billion left.

For the past six years, he has spent $ 238.4 billion on share buybacks and an additional $ 71.9 billion in dividends. There are only a dozen public bakery companies on Earth that I could not have acquired with that bankroll.

There is nothing necessarily wrong with stock repurchases. In fact, many investors have clamored for more of them. But the strategy is not adapted to a technology company with the visionary label of Apple and the footprint of Steve Jobs. In particular, Jobs refused to allow Apple to pay a dividend or buy shares when he ran the company.

The real problem with stock 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 of dollars he receives each year to be a strategic leader, if all he can defend is to buy back shares in the company.

Apple is investing in research and development: it spent $ 54.4 billion on R & D in the last six years. But it has little to show for those outlays in the form of new products. Its autonomous and secret vehicle unit seems to be far behind that of competitors as Alphabet, Uber, and Tesla. And although it has the hardware and device base installed to give it an advantage in streaming video, it has not been able to get any momentum in that business.

The tragedy of Apple, then, seems to be that the company, with its abundant balance and its culture of invention, does not live up to its reputation. Apple is in an excellent position to produce the next state-of-the-art technology for the consumer, whether in autonomous vehicles, virtual / augmented reality, drones or whatever. But instead, the administration seems largely content to return its profits to shareholders and increase the price of the shares.

Borrowing the idea from the iconic leader of another corporation, Facebook The CEO and occasional Tim Cook fighter, Mark Zuckerberg, once said: "The biggest risk is not taking risks … In a world that is changing very fast, the only strategy that is guaranteed to fail is not to take risks" .

Cook might want to take note. With the fall of iPhone sales in double-digit percentages and the fall of Apple's general revenue, it seems that the years of conservatism and risk aversion are catching up with the company. In the technological world, staying still is not a way to stay on top.

John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of the board of directors of The Motley Fool. Suzanne Frey, executive of Alphabet, is a member of the board of directors of The Motley Fool. Teresa Kersten, a LinkedIn employee, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Jeremy Bowman owns shares in Amazon, Facebook and Netflix. Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Netflix and Tesla. The Motley Fool owns shares of Microsoft and has the following options: long calls of $ 150 on Apple in January 2020 and short calls of $ 155 on Apple in January of 2020. Motol Fool recommends BlackBerry. The Motley Fool has a disclosure policy.


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