Apple is going to have a tough year
Let's briefly run down why:
- iPhone sales could go negative for the first time in history.
- iPad sales are shrinking, and show no sign of improving.
- The Apple Watch is not the blockbuster people thought it was going to be.
- Apple TV is OK, but nothing revolutionary.
- Apple's software and services - Apple Music, Maps, Health, Photos - are just OK.
- Smart, rational people in the media like Nilay Patel of The Verge, and Ben Thompson of Stratechery, think Apple's products were kinda meh in 2015.
So, as we enter 2016, Apple is poised for its toughest year in a while.
But, before we continue, some perspective.
- Apple is the world's biggest company, as measured by market value, with a $595 billion market cap.
- It has $206 billion in cash on hand.
- Apple had $13.5 billion in cash flow last quarter.
- It is expected to do $77 billion in sales this quarter.
So, even a "tough" year for Apple will be a great year that would be a record breaker for any other company, as measured by profits and revenue.
The reason Apple generates mind-boggling revenue is that it makes the best version of the most important consumer electronic product in history. The iPhone is the best smartphone, and the smartphone is the one gadget above all else - TV, video game console, laptop, even a car for some people - that matters most.
Apple will be able to sell millions of iPhones every year for years to come and the company will continue to throw off insane amounts of cash.
However.
Stagnant sales
Morgan Stanley's Katy Huberty says iPhone sales will drop 6% in Apple's fiscal 2016, compared to the year prior.
Huberty has always been a megabull on Apple, so her shift in sentiment is surprising.
She's not alone.
Both Credit Suisse and Stifel lowered their estimates for iPhone sales after seeing warning signs from Apple's suppliers. DigiTimes, the Taiwan-based news organization which is plugged into the supply chain, also warned that iPhone orders are coming in lighter than expected.
Brean Capital warned that sales could be down 10% in the first three months of 2016.
If the iPhone goes sideways, it's a big problem for Apple. The iPhone was 63% of its revenue last quarter, and a significantly higher percentage of its profits.
If the iPhone goes negative, Apple's revenue overall is likely to go negative because the rest of Apple's lineup is facing similar, or worse problems.
The iPad is in decline and shows no sign of bouncing back. It's been down or flat each quarter for the past two years.
The Apple Watch is a brand new product, so it's growing, but it too is a small percent of total revenue.
The big picture here is that Apple is looking at a year of low, perhaps negative, sales growth.
This will be a drag on the stock, and will shift the narrative on Apple, leading to a bunch of silly "Apple is doomed" stories. So, get ready for that.
Apple is not doomed. It's a cash machine.
However.
Mediocre new products
"What we got in 2015 was an Apple that released more products than ever, all of which felt incomplete in extremely meaningful ways - ways that meant that their products were just fine, and often just the same as everyone else's," says Patel.
Making products that are "fine" is not Apple's core mission.
"Our North Star is to make the best product," Tim Cook has said in the past. "Our goal isn't to make the design for this price point or this schedule, or line up other things, or to have x number of phones. It's to build the best."
Patel's biggest concern was that Apple tried to introduce new products that would serve as big platforms like the iPhone, but the new products weren't particularly strong so they didn't attract the developers who would turn them into great platforms.
Some of his most salient critiques:
- Apple Watch: "The Apple Watch offers little more than notifications and fitness tracking, and there are other devices that do a much better (and much more discreet) job of fitness tracking."
- Apple TV: "I can't get over the feeling that the Apple TV was rushed to market."
- Apple Music: "Apple Music is, well, kind of a mess. It has multiple priorities and multiple personalities, and multiple points of failure."
Patel isn't the only one sounding a quiet alarm about Apple products.
- ...too many of Apple's new products have too many features that don't work well all the time. It's the inverse of what made Apple unique previously, and much more in line with how most tech companies operate.
- The fundamentals at the core of many of Apple's new products aren't as strong as they could be not because Apple is necessarily incompetent, but rather because they involve skills and technology that Apple is simply not good at. Specifically, Siri and services.
On the first point, the Apple Watch is the best example.
Typically, when Apple releases a new product people complain that it doesn't do enough. With the watch, the opposite was the concern. It feels like Apple tried to do too much with it. As a result the software got bad reviews, and was panned as being confusing to new users.
Complaining that a product does too much is kind of silly though. In some ways, it's better to have a bunch of features and then improve them over time, or just cut them. It's atypical for Apple, but it's not the worst thing in the world.
The second point is the larger worry.
Relative to Apple's excellence at hardware, it is not good at software and services. Think about things like Apple Music, Apple News, Apple Maps, Siri, or any of the native applications that come with the phone. None of them is best in class. Spotify is better than Apple Music. Google Maps is better than Apple Maps. And so on, and so on.
If iPhone sales are on the cusp of going sideways, this is a problem. Apple needs to lock in its users with great services, and then figure out how to extract revenue from those services.
As we head into 2016, this will be the thing to watch. Can Apple juggle all these new products and platforms - the iPhone, Apple Watch, Apple TV - while also taking its good services and making them great?