Uncool or not, Apple is still a bellwether
If you've happened to spent the last nine months on Mars -- or just, more sensibly, ignoring a lot of the chatter about tech stocks -- you may not have noticed that Apple is no longer cool. It's not just rivals saying it, it's (reportedly) college students, and industry analysts, and bloggers -- lots and lots of bloggers.
Anyone who believes a company's stock price is not one of its most important PR assets might take a close look Apple's stock performance and the subsequent coverage in the press. Wall Street has cooled on Apple's stock. Suddenly, Apple isn't cool anymore.
Why, then, is there so much intense focus ahead of Apple's fiscal third-quarter earnings? Analysts, investors, and journalists are still looking to its financial report card with more interest than they showed to Google or Microsoft, or will show to others like Facebook, still to report. This is because Apple, more than any other company in Silicon Valley, is a proxy for the tech sector itself, a company not only active in hardware, software, and the Web, but one that has helped shape them in the past decade.
Apple's stock has fallen from a record high of $705 last September to last month's low of $389, a loss of 45 percent over nine months. But little of this has to do with the company seeming less cool. (Never mind that proclaiming something as cool or uncool should automatically disqualify you as an expert on cool.) The real issue facing Apple and its earnings is that what ails the company is what ails the tech industry at large. For that reason, Apple's earnings report is very much worth following this quarter, as it is every quarter.
By several key measures, Apple is going through a hard time. Revenue growth has been declining for a while: Revenue grew 11 percent in the March 2013 quarter, down from 57-percent growth in March 2012 and 83 percent in March 2011. Analysts are expecting revenue to be flat this quarter at around $35 billion.
Operating margins, meanwhile, have also been falling to 30 percent in the March 2012 quarter from 39 percent a year earlier. That caused Apple's net income to slip 18 percent in the quarter, a rare event for the company, and prompted a lot of debate over whether Apple has new products in development that could restart growth. Apple's secrecy over new products has kept that debate more speculative than informative.
What's clearer is that the forces driving down revenue growth and profit margins were inevitable, even if they came a lot faster than many expected. The iPhone and the iPad pushed smartphones and tablets into the mainstream market, giving Apple a strong early lead in both, while maintaining healthy margins. But Android devices quickly offered low-cost alternatives that were especially appealing in emerging economies. It's taken only a few short years for smartphones and tablets to start to become commodities, with the bulk of coming at the low end.
Apple's response may be more lower-priced iPhones, and perhaps larger screens for iPhones to appeal in countries where they are popular. And yes, lower prices will weigh on both revenue and the thick cushion of profits that Apple has long enjoyed in these markets. But it may also pave the way for a new area of growth.
As Fortune's Philip Elmer-Dewitt noted, iTunes is growing nicely. So nicely, in fact, that it may surpass both iPads and iPhones in terms of revenue growth this quarter. The division now includes Apple's own software like Aperture and iWork, which could help it contribute materially to Apple's bottom line. Rather than being a break-even business to promote higher-margin products iPhone and iPad, iTunes and software may become an area of growth to tide Apple over until new products are released.
As Apple's earnings draw near, a sense of optimism is growing that the quarter may be stronger than the bearish sentiment would allow. The stock has risen 10 percent from its lows last month, closing Monday at $426. Traders in the options market are seeing bullish indicators for the stock in the near term. Apple's stock is often tricky to predict, but if its earnings surprise, any share gains that follow may lead bloggers to wonder if it's cool once again.