Apple is not facing midlife crisis despite iPhone worry

People are worried about iPhone sales. And rightfully so. Apple at least for the time being won't come anywhere close to the lightning fast growth people have come to expect. So now it's time to shift the conversation about Apple to its overlooked strengths.

Since Apple's stock price reached a record closing high in February 2015, the company has shed one-quarter of its market value. The decline has come largely because investors don't think the current generation iPhones will sell at the rapid clip of the 2014 iPhone 6 line -- the first with larger screens that made the iPhone 6 arguably the most anticipated smartphone ever.

Its range of innovations and apps makes the upgraded Apple TV box the best TV streaming device available.
Its range of innovations and apps makes the upgraded Apple TV box the best TV streaming device available. Photo: iStock

Wall Street expects iPhone sales for the fiscal year ending in September will barely budge - and might even decline - from last year. That would be the worst year for iPhone sales since the device was introduced in 2007.

Fortunately for Apple, most of its smartphone competitors are struggling. But the iPhone doesn't so much compete with rivals as it competes with its own ever rising bar of expectations that (for now) the company can't hope to top. With iPhone sales generating about two-thirds of Apple's total revenue, it makes sense for investors to nibble their fingernails in worry.

The panic has grown in recent weeks because of dribs and drabs of data points from the universe of companies that sell parts like computer chips and camera lenses for the iPhone. The latest are from the Wall Street Journal and Nikkei, which each reported Apple ordered factories to cut their production of iPhones. It'is understandable that investors monitor every utterance from suppliers for hints of iPhone sales trends. It doesn't help that Apple itself doesn't offer sales predictions more than a couple months ahead, and it is famously unreliable when it does.

Piper Jaffray analyst Gene Munster - one of the most bullish Apple analysts - pointed out that it is typical for Apple to ease back iPhone manufacturing in the months after the launch of a new phone line. We are in such a period now, after the debut of the iPhone 6S versions in September.

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The worry this time around is that the scale of production cuts looks larger than they have been in the past. As Wall Street has digested the information from Asian suppliers, the average 12-month price target on Apple's stock has come down by about 1 percent since mid-December.

Now that we're growing comfortable with Apple's growth engine being dead or dormant, it's time to embrace the beauty of Apple in middle age. Sure, Apple won't be as spry as it used to be, and there are hints of crow's feet around the eyes. All that means is that with the youthful glow faded, Apple and its investors can focus on the company's true beauty: spectacular profits at a cheap price.

Apple generated more than $US53 billion in net income in the fiscal year ending in September - far more than any single company in the S&P 500 index and about equal to the combined yearly profits of the bottom 125 companies by market capitalisation.

And even though Apple is the most profitable company - and the most valuable company in the world by stock market value - its stock trades at about five times expected earnings before interest, taxes, depreciation and amortisation for the next year, excluding Apple's huge cash holdings. That compares with about 13 and 18 for Google's parent company and Facebook, respectively.

The longer-term question is whether Apple is experiencing a temporary slowdown in sales growth before the next kick from the iPhone 7 or another product or whether hyper growth has petered out altogether.

It's too soon to believe the sales jolt will come from nascent technologies like the Apple Watch, the company's long promised revolution in the TV business or future electric minivans. Apple has also trumpeted the rapid sales pickup of apps in its App Store, but even $US6 billion in revenue still amounts to less than 3 percent of Apple's total yearly sales.

Investors shouldn't completely discount concern about the iPhone, the star that stirs Apple's drink. But they shouldn't worry too much, either. Instead, they should be reassured by those abundant profits.