Forgive the sarcasm implied by this post’s headline, but I cannot believe the reflexive way that the market reacts to quarterly results for companies that are lapping the field in their industry.
Yesterday Apple reported sales and earnings for their fiscal third quarter that were fantastic. To use a phrase that some of us have heard before, insanely great results. Yet somehow analysts compare the actual financial performance to their back-of-the-envelope estimates, find the results slightly less than they feel they should be, and the stock drops by 5 percent. Here’s an example of what passes for analysis these days:
“Where are you going to find growth in the world?” {Colin Gillis, an analyst for BGC Partners} said. “You’ve done an amazing job sucking all the smartphone profits into your balance sheet, but smartphone sales are slowing. What’s going to happen when the industry matures, just like PCs did?”
If you ask me, comparing the smartphone industry to the PC industry is a non-starter, because the PC industry includes companies that are a lot less innovative than Apple and the Android consortium (Google and its hardware followers). The PC industry is shrinking at the moment because nobody in the PC industry makes anything compelling in terms of a new product design or a compelling new application; Not because the folks around the world who already own PCs couldn’t afford to replace them if they saw a compelling device that did something that their current PC doesn’t do.
Let’s talk about what the real constraints on iPhone sales are likely to be going forward. One big one, as far as I see it, is the change in the way carriers in the United States allow their customers to finance smartphones.
I am looking to replace two iPhones in the Fall, once Apple releases the successors to the iPhone 6 line. AT&T and Verizon are no longer willing to allow me to renew my two-year contract and purchase subsidized phones without charging me more for service than they would if I held on to my current phones.
It used to be that you paid the same amount for mobile service regardless of whether you were paying for a subsidized phone or not, and both AT&T and Verizon consider this change to the two-year contract model to be a new “feature” of their billing plans for customers, that they argue saves the customers money.
I think a large number of existing U.S. smartphone customers who are coming to the end of their contracts with the big-two U.S. carriers are in for a shock when they realize that they can’t buy the latest iPhone or Samsung Galaxy S phone for a subsidized price without increasing their monthly bills for wireless service. And they may not want to pay for their phones over 18 to 24 months as part of their wireless service fees, in the fashion that AT&T Next and Verizon Edge service plans currently dictate.
What the financial ramifications of the carriers’ device subsidy changes means in terms of the impact to Apple’s unit sales going forward is still an open question in my mind. There’s a good chance that people in the U.S. who are on a budget but know that they really get a lot of value out of their phones will allocate more money to their mobile devices and less money to services like television.
So what I’m saying is that I could see these device financing changes initiated by the carriers not having as great an impact on Apple and Samsung as they do on service providers who are ancillary to smartphone use, or who are apparently unrelated but are grouped together with smartphones by home budgets for communications and entertainment.
In order to scale billing-related issues like this up to the world, you’d have to factor in mobile phone contract standards in all of the countries where Apple has a large enough business to impact their bottom line. Perhaps you could roll up all of the countries in Europe and do macroanalysis on the upgrade cycle, and all of the countries in Asia whose mobile device markets function similar to each other.
The other big question is what are the constraints on iPhone sales are in markets outside the United States? Everybody is concerned about the prospects for future economic growth in China due to the recent downdraft in Chinese stock markets. Apple has told us that it sees quite a bit of its growth coming from Greater China in the future. I don’t know to what extent the volatility in the Chinese markets correlates to macroeconomic conditions in China itself.
Based totally on what other people have told me, I think that Xiaomi and Apple are going to end up as the top holders of smartphone and tablet marketshare in Greater China for the foreseeable future. They will be followed by Samsung in third place for a while, and then many smaller Chinese and non-Chinese brands.
I think that Apple’s top and bottom line from that area will continue to grow at a faster rate than in the rest of the world. But, I am not sure that the rate of growth that was projected for China six to 12 months ago is still likely.
This type of analysis isn’t what Operation Gadget has been known for, but I think it’s important to mention because analysts see more to worry about with respect to Apple’s future than they should.
I think that Apple is doing a great job with issues that it can control, and has the resources to ride out the intermediate-term issues in the world that it can’t control. Their product strategy is fantastic, especially compared to the companies that the public considers its competitors.
If I had money to invest, I’d buy on pullbacks like this.