Apple on Tuesday announced its best quarterly results, with a record profit of $18.4 billion on record sales of $75.9 billion, fueled by record sales of 74.8 million iPhones. CEO Tim Cook declared the numbers for the quarter ended Dec. 26 "our strongest financial results ever" and "incredible."
So of course Apple shares have opened trading Wednesday with a loss of more than 4.5% (as of this writing). Investment pundits have begun talking about whether the world has passed "peak Apple," as though anyone and everyone who could conceivably want an iPhone already has one.
What are we supposed to think about this?
The simplest explanation for the stock sell-off is that the stock market exists to discount the future, and Apple's future — its near future, to be sure — doesn't look quite as glittery as its recent past.
For Apple, the iPhone is the ballgame, accounting for nearly two-thirds of revenue in recent quarters. But iPhone sales are expected to plummet in the current quarter: The company projection of a revenue decline to $50 billion-$53 billion implies iPhone sales falling to as few as 50 million. That would represent a fall-off of 16% from the same quarter last year and of one-third from the past quarter, when iPhone sales advanced from a year earlier by less than 1%.
In his earnings conference call with investment analysts, Cook mentioned numerous headwinds facing the company. These include economic doldrums around the globe: "Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies," he said. "We're seeing extreme conditions unlike anything we've experienced before just about everywhere we look."
Then there's the weakening of foreign currencies, especially the euro. Because two-thirds of Apple's sales happen overseas, that has a big impact. Currency adjustments alone sliced nearly $5 billion off Apple's quarterly revenue, reducing its gain over the year-ago period from the 8% that would have been recorded had currencies remained stable, to a mere 2%.
It's worth noting that despite Apple's ruling position among consumer electronics makers and its status as one of the world's most profitable companies, Wall Street hasn't been entirely in love with the stock. As of this moment, Apple trades at a price-earnings multiple of about 10 based on trailing 12-month earnings, compared with the multiple of 21 for the Standard & Poor's 500.
The P/E of Alphabet, the company formerly known as Google, is 30; for Facebook it's 97; and for the chronically profit-challenged Amazon it's 852. That may not seem fair to Apple, but life and the stock market aren't about being fair. To pump up the price, Apple has resorted to that old standby of companies running out of ideas: the stock buyback. Apple repurchased $6.9 billion of its shares in the last quarter, on top of a record $14 billion in the previous quarter.
Still, doubts about Apple's stock are driven today not by the most recent earnings, but about what the future holds. One could hear in almost every line of the earnings presentation by Cook and CFO Luca Maestri an effort to shift investors' perceptions of the company from a maker of hardware to a purveyor of services.
Their argument is that, regardless of what happens to unit sales of iPhones, the installed base of 1 billion phones, iPads, Macs, Apple Watches and Apple TV units is a platform to sell billions of dollars in apps, movies, music, cloud storage and other intangible stuff to customers. From this standpoint, past sales are the gift that keeps on giving. "The vast majority of the services we provide to our customers," Maestri said, "are tied to our installed base of devices, rather than to current quarter sales."
Services in the Apple ecosystem, including the App Store, Apple Music and iTunes, showed revenue growth of 15% over the year-ago quarter, the executives said. But sales still came to a meager $5.5 billion, less than 20% of total revenue.
Apple's real problem may be that its stock price is tied to expectations about its hardware. The company is locked, like a hamster on a wheel, into the need to drive consumer excitement about upgrades and new products in an endless loop. The counterweight is that with revenue and profits as large and sales as robust as they've been in the past, even big numbers look incremental.
Cook ran into this buzz saw himself during Wednesday's call, when he observed that selling 74.8 million iPhones in three months translated into "over 34,000 iPhones an hour, 24 hours a day, seven days a week for 13 straight weeks." That just got people thinking about how hard it is to keep selling that many phones day after day into the limitless future.
At this moment, Apple is caught in a lull between product cycles. Its last iPhone, introduced in September, was a minor upgrade to the iPhone 6 and 6 Plus, introduced a year earlier. The Apple Watch, which went on sale early last year, doesn't seem to have taken the consumer world by storm; the company still doesn't break out its sales figures, which makes it seem that there may be nothing to crow about.
The Apple TV box competes with several entries in the streaming-video space, including Google's Chromecast and Roku's lineup, without offering much that's unique. The mysterious Apple Car effort has stalled, with the departure of a key executive and a hiring freeze, according to reports in the Apple news universe.
As a result, Apple investment fans are left thirsting for the next big thing. Their hopes and fears are wrapped up in the iPhone 7, presumably to be unveiled in September. The speculation machine about the new device already is revving up, so you can imagine what it will look like as the release date approaches.
How good will the iPhone 7 have to be to get investors, not just consumers, excited? It's hard to say, given the mediocre performance of Apple shares — over the past year of sterling financial performance, the company has lost nearly 28% from its peak above $131 in May.
As a manufacturing and consumer goods company, Apple may be just too big and successful. Its investors not only are asking, "What's next?" With a yawn, they're asking, "What have you done for me lately?"