iPhone sales are slowing. The stock market and world economy are wobbly. Apple’s secretive car project has apparently stalled.
Apple faces a bumpy road this year.
Apple CEO Tim Cook said as much Tuesday, after the company announced the slowest growth in the nine-year history of the iPhone and Cook acknowledged that iPhone sales will decline, year over year, in the current quarter. He blamed vexing economic conditions in China, Russia, Brazil and elsewhere for the financial performance, which included declines in the sales of iPads and Macintoshes.
The company warned investors to expect revenue in the second quarter to fall up to 14% not what investors want to hear from a “growth company.”
Wall Street reacted with alarm, sending Apple shares down nearly 7% in trading Wednesday and raising questions over how Apple can kick-start growth. They slipped further Thursday.
A turnaround could start with the release of iPhone 7, rumored to be launched in September. But unless that product attains blockbuster status as iPhone 6 and iPhone 6 Plus did, Apple could enter trying times.
What’s a giant company, still the most valuable in the Standard & Poor’s 500, supposed to do? Here are five things the company needs to do to get back on a growth track:
Put cash to better use
Apple has turned into a multibillion-dollar savings account. Apple ended the just-reported December quarter with $215.7 billion in cash and investments. That’s more than any other company in the Standard & Poor’s 500 and up 22% from a year ago. But the company isn’t doing much with the money, most of which is stored overseas to avoid the taxes owed if brought home.
Currently, 93% of Apple’s cash is overseas, says Standard & Poor’s Ratings Services. Instead, the company has been loading up on long-term debt now to the tune of $53 billion to give it liquidity to pay a dividend and buy back shares.
Rather than using cash for financial engineering, Apple should look to use it to buy start-ups in areas it is lacking, such as virtual reality, messaging and artificial intelligence. Apple has scooped up more than 25 small companies over the past two and a half years, including recent purchases such as Emotient, a start-up that uses artificial intelligence to read facial expressions, and Faceshift, whose motion-capture technology lets animated avatars double the facial movements of real actors.
Its rivals, meanwhile, have made bigger splashes. Facebook spent billions on VR pioneer Oculus, popular photo-sharing service Instagram and WhatsApp, a leader in mobile-messaging. Google snapped up Nest, considered vital in the Internet of Things space.
Find ways to innovate in a stagnant smartphone market.
You probably already have an iPhone, if not two or three. But that’s the problem.
The smartphone market is increasingly looking like the PC market: Mature and stagnant. Consumers are slower to upgrade to the latest iPhone, as they see the one they have as being “good enough.” Making things even more difficult is the decision by carriers to do away with subsidized two-year contracts that masked the $650 price tag of iPhones.
Apple needs the iPhone 7 to be a winner. Apple gets 68% of its revenue from the smartphone. The Apple Watch, billed as the next biggest thing since the iPhone, doesn’t appear to have the broad appeal to make up for stalling growth of the smartphone. A new version of the Watch is expected in March, but barring killer features and apps, its standing in the consumer market isn’t like to change much.
Enter the car market.
Apple won’t publicly acknowledge Project Titan, its auto-related venture, but it is likely a centerpiece of the company’s future. Whatever its final form a driverless car, digital dashboard or something else the concept of a moving ecosystem of Apple products is the ultimate lifestyle choice.
It’s a big bet that comes with many moving parts. Apple is competing with major automakers, Tesla and upstart Faraday Future while it copes with the recent departure of the head of the project, longtime Apple engineer Steve Zadesky, and a reported hiring freeze within the 1,000-person project. Apple’s design chief Jony Ive, according to one blog, recently expressed his displeasure with progress of Project Titan never a good sign within the Apple universe.
Figure out services
Many of Apple’s services so far have fallen flat. Despite a $3 billion bet on Beats Music in 2014, its tweaked Apple Music streaming service trails leaders Pandora and Spotify and has failed to be a big revenue generator. Apple Pay made a splash with advertising, but has failed to catch on because of reluctance by large retailers to hand over the relationship with their customers to Apple. Apple’s cloud services remain rudimentary, helping people to back up their photos an area where competitors offer better solutions.
Apple needs to find a way to monetize the users of its 1 billion hardware devices, even if they’re not buying new gear. Investors are worried an emphasis on service is an ominous sign, UBS analyst Steven Milunovich said in a report.
“The investor concern is that companies like Xerox and semi-cap names start talking about services as they are going ex-growth,” he said.
Apple needs to find a way to tap existing users for add-on services, said Abhey Lamba, an analyst at Mizuho Securities.
Reach emerging markets
The developed world is up to the gills in smartphones and tablets already. But it’s a different story in emerging nations, where there could be growth left. Apple grew 14% last quarter in China.
But it’s unclear if the company’s strategy of selling high-priced smartphones will appeal to a country with lower per-capita income than in the developed world. Winning over emerging nations won’t be as easy as some bulls thought, given Apple’s “sobering” commentary about the slowdown in China and other less-developed nations, Lamba of Mizuho said.
“The company indicated material softness in China,” Lamba said. Apple is expected to boost investment in India to help counteract the problems in China, he said.
Despite all its troubles and its falling stock price, Apple remains a favorite with investors. Analysts still think the stock can be worth $136.47 a share in 18 months, said S&P Capital IQ. That implies a roughly 46% upside from Wednesday’s closing price of $93.42 a share.