On Wednesday afternoon, Apple announced that during the last three months of 2012, it earned more money than any other non-oil company has ever earned in a single quarter. (Gazprom, Royal Dutch Shell, and ExxonMobil have each topped Apple’s earnings one time.) What’s more, during all of 2012, Apple’s profits topped $41.7 billion, which is also a record for any firm outside the oil industry. (ExxonMobil earned a few billion more in 2006, 2007, and 2008.)
The superlatives didn’t end there. Apple sold nearly 48 million iPhones over the holidays. It didn’t specify how many of them were iPhone 5s, but it’s likely that most were the latest model, which would also be a record for the smartphone business—the iPhone 5’s closest competitor, the Samsung Galaxy SIII, took seven months to sell just 40 million units. Then there’s the iPad: Apple sold 23 million in three months, which is about 50 percent more than it sold during the holidays last year, and also a record. No other company has ever come close to selling as many tablets in so short a time.
To sum up, the world’s most valuable company posted one of the most stunning quarterly earnings reports in corporate history. Sales of its most important products were through the roof. So investors were thrilled, right? Nope. Apple’s stock began to swoon in after-hours trading, and today it’s down 12 percent. Commentators are saying that Apple has “hit a wall,” that it is “slowing down,” that we are witnessing the beginning of the end of Apple’s “magic.”
All of that is totally bogus. It’s wrong in the specifics—if you dive into the details of Apple’s quarter, it’s hard to find a single sign that consumers are sick of its products—and it’s wrong with regard to the larger storyline. Rather than paint a picture of a company in decline, Apple’s earnings in 2012 show just the opposite. In a year of stiff competition, Apple managed to do something that none of its rivals could: make tons and tons of money by selling lots and lots of products at premium prices.
If I headed up any of Apple’s competitors, I would look at its quarterly earnings with a mix of dejection and awe. In 2012, Samsung, Apple’s most worthy rival, released dozens of phones across a range of prices and screen sizes, and it spent an order of magnitude more on marketing those devices. Even so, its flagship phone couldn’t even come close to outselling the iPhone, and its overall corporate profits didn’t match what Apple made from the iPhone alone. Apple’s dominance of the tablet business is even starker. This year several of Apple’s rivals put out great iPad competitors like the Nexus 7 and Kindle Fire HD that are selling at cost. And yet not only did iPad sales grow, they grew faster than the industry average. In other words, Apple’s rivals threw everything they could at the firm and still couldn’t dent its sales records. If that’s hitting a wall, every one of Apple’s rivals wishes it were lucky enough to hit that wall, too.
If Apple did so well, why is Wall Street shellacking it? There are a few small problems and one big worry. First, Apple didn’t sell as many products as Wall Street analysts had predicted. Analysts expected 50 million iPhone sales and 5 million Mac sales—about 2 million phones and 1 million Macs more than Apple reported selling. Second, its growth rate is slowing, especially its growth in profits. In the holiday quarter between 2010 and 2011, Apple’s profits almost doubled, and between 2011 and 2012 profits more than doubled. In the last year, though, profits were basically flat—yes, they were flat at near-record levels, but flat is flat. And that gets us to problem No. 3: Apple’s profitability is declining—for every dollar in sales during the holidays in 2012, Apple made less than it did during the holidays in 2011.
None of those problems, though, justifies the stock slide we’ve seen today. Let’s look at the small shortfall in sales: As CEO Tim Cook explained in a conference call with investors on Wednesday, one of the main reasons that Apple didn’t sell more iPhones, iPads, and Macs during the holidays is that it couldn’t make them fast enough. Throughout the holidays, supplies of the iPhone 5, iPhone 4, iPad Mini, and the company’s latest iMac were extremely tight. You couldn’t just go into a store and buy Apple’s newest products (as you could for any other phone, tablet, or PC on the market)—instead, the only way to get one was to order it days or weeks in advance of delivery.
Of course, that’s no consolation to Apple’s bottom line—a lost sale is a lost sale whether it’s due to limited demand or limited supply. But Apple’s inability to make phones, tablets, and computers fast enough to satisfy consumer demand does tell us that people around the world are still clamoring for its devices. Limited supply, unlike limited demand, is something Apple can fix. In the grand scheme of things, it’s not such a terrible problem.
What about Apple’s declining growth and profitability? The growth problem is easy: After doubling many of its metrics every year for several years in a row, Apple might just be confronting the law of large numbers, as the New York Times’ James B. Stewart argued last year. Apple is now so big that it’s impossible for it to mushroom the way it once did. In the last quarter of 2012, it sold 10 million more iPhones and 8 million more iPads than it did in the same period in 2011. Those are huge increases; any other company would have killed to see such sales spikes. But as a percentage of Apple’s monster overall sales, these additional sales look less than stellar.
Apple’s profitability decline, meanwhile, was mostly due to a single product—the new iPad Mini, which sells for $329, significantly less than the full-size iPad. Because more people were buying cheaper iPads, Apple didn’t earn as much profit as it once did in the tablet business. But this isn’t a reason to panic about Apple’s future. Remember that the iPad Mini is competing with devices that aren’t making any profit at all. If Apple can still make money—albeit less, as a percentage, than in it did in the past—in the otherwise profitless tablet business, we ought to regard that as amazing, not worrying. That’s especially true when you consider Apple’s larger opportunity in tablets. If the tablet business comes to surpass the worldwide market for PCs (as many expect will happen), and if Apple’s lower prices allow it to remain the largest player in that market, in the long run it will make up for its slightly smaller profits with vastly larger volumes.
Of course, most sophisticated analysts understand all this about the firm. And yet Apple’s stock is taking a beating anyway. That’s why I don’t think there’s any one thing that’s causing investors to flee. Instead, there’s a bigger, more nebulous worry: When people start talking about Apple “hitting a wall” or losing its “magic,” what they’re really saying is that they fear some deeper void at the firm, a lack of the passion and innovation that made it so extraordinary for so long. There’s no data to back up this claim; nothing in this quarterly report supports it. It’s just an inchoate sense of dread, one sparked by Steve Jobs’ death and confirmed by every slightly negative story one hears about Apple. The fact that Apple’s maps program was so buggy, say, or that it had to release a smaller iPad and a bigger iPhone to compete with rivals, or that it hasn’t put out a category-defining new product since the iPad—the Apple worriers see all these as signs of its diminishing clout.
I think that such fears are overblown. A year ago, I argued that considering its dominant market position, Apple’s stock was too cheap at $500 a share. Then, last fall, I argued that the only real difference between Cook’s Apple and Jobs’ Apple is in size and scope—under Cook, the firm is larger, more efficient, and more aggressive. I still believe all that about Apple, and I think its stunning quarterly earnings bolster my view. Apple, under Cook, is at the top of its game, and it’s still far from realizing its huge, long-term potential in the smartphone and tablet businesses.
We’re certain to keep seeing huge sales from the company. But I’m no longer convinced that Apple’s stock price will rise with its earnings. That’s because the market attitude toward Apple seems unmoored from its actual performance. Apple is still the most spectacularly well-performing firm in the tech industry. Now it just needs to find a way to prove it besides monster sales and monster profits.
