Apple in 2014: Bullish or bearish?

An Optimist’s and a Pessimist’s Case for Apple in 2014

An Optimist’s and a Pessimist’s Case for Apple in 2014

Forecasting today’s biggest business and tech trends.
May 23 2014 10:16 AM

Two Bites of the Apple

Three years into Tim Cook’s reign, are we bullish or bearish on the house Steve Jobs built?

Tim Cook
Apple Inc CEO Tim Cook speaks on stage during an Apple event in San Francisco, California October 22, 2013.

Photo by Robert Galbraith/Reuters

On June 2, Tim Cook will likely deliver the keynote address at Apple’s Worldwide Developers Conference. Held every year around this time, WWDC is Apple’s big show—and not just for the company. The tech press whips itself into a fine froth in the run-up to the event. Every journalist, blogger, and fan on the Apple beat tries to scoop the other with the latest gossip and wildest predictions. Is this the year of the iWatch? An Apple television? Something else altogether?

Here’s what I can predict: the Apple of 2014 isn’t going to be made or broken by the sex appeal of whatever Cook demos on stage. Pundits love to trot out super bullish or über-ursine predictions every year around WWDC, as if the fate of the company hangs in the balance. But that’s hardly the case. Apple is a sober, mature company, with a $600 billion market cap, $45.6 billion in quarterly revenue, and a 39.3 percent gross margin. It’s increasingly catering to shareholders: raising its dividend and increasing its stock buybacks. It’s even been issuing bonds—a $17 billion offering last year, followed by a $12 billion offering the other week—to take advantage of low Treasury interest rates, and to offset the tax bill on the 88 percent of its $151 billion in overseas holdings. It’s the kind of company that makes sizeable acquisitions—like its rumored $3.2 billion Beats deal—to secure brands and perspectives outside of its own, but that are complementary to its objectives.

People talk about Apple as if, after all these years, it’s still a startup. It’s not. Nevertheless, it’s a growth-oriented company, and that growth is at a crossroads. Most of it is coming from a single product, the iPhone. That product is approaching its eighth generation. On the other hand, the iOS platform has lots of room for expansion—into every device imaginable.


Here are two competing assessments of the company’s health.

The Pessimistic Analysis

Apple is in a dangerous position. It’s a hardware company, dependent on high margins and frequent customer replacement. Most of its hardware lines are long in the tooth, and customers aren’t fetishizing them like they used to.

The iPod, for example, is not entirely dead, but it’s dying quickly—sales are down 51 percent year-over-year, as the feature-richness of the other iDevices has rendered a single-purpose media player largely obsolete.

Then there’s the iPad. The fastest-growing product in Apple’s history has stopped growing. Sales are down 16 percent year over year, per Apple’s quarterly reports. Apple moved 16.4 million iPads in Q2 of 2014, down from 20 million in Q2 of 2013. Engadget’s Chris Velazco thinks the iPad may be a victim of its own adequacy:

Some have also argued that the iPad's main market consists of high-income consumers, and they've already got their iPads. After all, we nerds may upgrade at the slightest provocation, but the iPad isn't bound by a mobile contract that promises you a good deal on a new one in two years. It’s more fixed than that, so it shouldn’t be surprising that people tend to hold onto them.

On Apple’s most recent earnings call, Tim Cook offered a rebuttal to iPad bears. He emphasized that 210 million iPads have been sold so far, and that the iPad has grown at twice the speed of the iPhone since its launch. But these are lagging statements, and they don’t satisfy. Yes, the iPad has been a phenomenal success to date. In all likelihood, the iPad will remain a big seller for Apple for many years to come—but it won’t be the growth engine it has been. It seems everyone in America who wants an iPad already has one, while the iPad’s position in China is an unsettled question.

Apple could break out a big new product line in the wearables market. But that market’s been a tough nut to crack. Wearables like the Nike FuelBand and the Samsung Galaxy Gear have failed to impress the general public. The more ambitious Google Glass has yet to launch big—and many of its early testers aren’t quite sure it’s ready to. If Apple is getting into the wearables game, it’ll have to take a different approach. Furthermore, it’ll risk a confrontation between its new device (iWatch or otherwise) and the iPhone, its flagship product. The iPhone is quite good at almost everything these days. The iWatch will need to carve out exciting new use cases to set itself apart—but those use cases can’t be too specific, or they’ll limit the size of the market for the device.

The Optimistic Analysis

The future belongs to iOS, and Apple has plenty of opportunities to exploit it.

The iPhone is still growing like crazy after seven years on the market. It accounted for approximately $58.6 billion of Apple’s $103 billion in revenue in the year to date. Year-over-year revenues for the iPhone are up 17 percent so far, with much of that growth coming from international markets. In Q2 of 2014, Apple sold almost 44 million iPhones, up from 37.4 million in the same period last year.

Presumably, a lot of this growth comes from China. Apple’s deal with China Mobile puts the iPhone in theoretical reach of a staggering 700 million mobile customers. Those customers, growing more affluent by the year, have demonstrated fairly American consumer patterns. We can expect that they’ll trade up for newer, shinier iPhones in much the same way that Americans do. That’s great for Apple, because it yields a predictable business cycle, it simplifies demand forecasting, and it makes supply-chain management easier. (All of those things, we should note, are Tim Cook’s specialties.)