iPhone makes a bad week for Apple, a good one for Facebook

Imagine recording the biggest quarterly profit in the history of capitalism, and then sitting back helplessly to watch your share price tank. 

It's no fantasy, because it happened this week - to the world's biggest company, no less: Apple. 

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And as the week drew to a close, Apple was actually close to potentially surrendering the coveted top status to Alphabet (formerly known as Google), which is reporting results of its own next week. 

On Friday morning, Apple's market capitalisation stood at $US520 billion ($734 billion) compared to $US489 billion for Alphabet.  Sure, that's a gap of $US31 billion, or $44 billion (about the market value of Australia's Wesfarmers, which owns the supermarket chain Coles), but still, it's the closest it's been in a while.

Disppointed: Facebook and WhatsApp said the company had already cooperated with investigations.
Disppointed: Facebook and WhatsApp said the company had already cooperated with investigations. Photo: Bloomberg

 

It was a difficult week for the iPhone maker, despite reporting a $US18 billion profit. 

On local shores, it was once again engulfed in a media storm about the conspicuously low amount of tax it pays in this country ("Apple Australia pays all taxes it owes in accordance with Australian law", is the company's statement).

Yet, on the other side of the Pacific Ocean, at Apple's corporate headquarters in Cupertino, California, CEO Tim Cook and the rest of his management team were grappling with a much bigger problem. The iPhone, the insanely popular, smash hit product that lifted Apple's market value to unprecedented heights, appears to be running out of steam.

Peak iPhone

Apple actually sold a record number of iPhones during the December quarter, which encompasses the key Christmas trading period. But that record number, 74.8 million units, was a paltry 1 per cent above the previous record, set a year earlier.  It might seem strange that record unit sales and a record quarterly profit failed to impress investors, but Wall Street is obsessed with growth, and the worry is the iPhone has hit its peak. 

"It's too successful, that's their problem," Jason Sedawie, of Brisbane-based Decisive Asset Management, says of Apple and its iPhone. "Everyone's already got one."

What's more, it looks like things are going to get worse before they get better.  For the first time since before the iPod (the MP3 players, remember those?) was released in 2001, Apple said it expects to report a decline in quarterly revenue next time it reports results in April. Credit Suisse is even forecasting that the company's total revenue for the full financial year will shrink.

Over the last couple of years, Apple has been able to juice up sales by introducing larger screen versions of the iPhone and by expanding into new markets like China.  With the next iPhone not expected until September and China's economy looking shaky (Cook for the first time admitted the company was witnessing "softness" in that key market) it's not clear where, in the short term, growth will come from. 

 "The smartphone market at the high end is looking totally penetrated," Sedawie says. "The upgrade cycle is every two and a bit years and it's getting longer and longer. Now they've already got the bigger screen, what's going to convince you to get a new one?"

Apple's first foray into wearable devices with the Apple Watch, and its impressive set top box, the Apple TV, are both selling well, but nowhere enough to pick up the slack from a stagnant iPhone. Rumours about an Apple foray into automobiles continue to abound, but they remain just that: rumours.  

Not a problem for everyone

Ironically enough, while the smartphone is becoming a headache (of sorts) for Apple, it has been an absolute godsend for Facebook.

The social media giant crushed expectations with its own earnings this week. The company revealed that more than a billion people use its core service now each day, 934 million of them on a mobile device.

And most importantly, while its base of users is absolutely enormous, the company is also making real money from them, posting a $US3.7 billion profit in 2015.  Most of it comes from people using phones. It said 80 per cent of its revenue now comes from mobile advertising.

This year, Facebook will attempt to prove it is more than just Facebook (its eponymous social network). The company is taking orders on Oculus Rift virtual reality headsets, which it expects to start shipping by March. It has a new strategy to make money from WhatsApp, the messaging service it acquired for $US17 billion in 2014, which is used by 900 million people in its own right. It could also stuff more ads into Instagram, its popular photo sharing smartphone app.

The year the FANGs bite back?

Last year, Facebook, Amazon, Netflix, and Alphabet (Google) all soared on the US stockmarket. So stunning was their rise in an otherwise flat sharemarket that it spawned its own acronym: the FANG trade.

There has been a big debate about whether the FANG stocks would be able to repeat last year's stunning performance in 2016. The jury's still out, but Facebook's strong performance suggests at least one of them could. (Amazon's results on Friday morning were less well received by investors, and Netflix shares have slipped about 10 per cent since its result, earlier in January).

Apple was notably not a member of this group. Its shares went backwards in 2015, just the second time that has happened on an annual basis since 2007, when the first iPhone was released. 

Plenty of people have looked ridiculous predicting the decline of Apple before. And that is certainly not the intention of this piece. The company is still in a position many others could only dream of.  As the New York Times noted this week, Apple's annual revenue from the iPhone alone last year ($US154 billion) was greater than the economic output of two thirds of countries on earth.

Even if iPhone sales stop growing, Apple could potentially make more money by selling iPhone users more online services, such as its subscription music service, Apple Music. Apple has an installed base of 1 billion users across all of its devices. A few bucks extra each month from them could turn out to be quite substantial. 

The stock is also starting to look undervalued on many measures. Which means Apple could begin to attract more value-oriented investors, who are less worried about growth and eager to buy assets for less than they're worth.  Plus, Tim Cook has a warchest of more than $US150 billion to play with. He can use it to develop new products, or buy other companies,  and to pay dividends and buy back stock, which should support the share price.  

As Benedict Evans, from the prestigious Silicon Valley venture capital fund Andreesen Horowitz, explained on Twitter: "Apple's market position is secure (until the next time everything changes) but it could only ever grow so far." 

Changing of the guard?

So, could there be a change in the stockmarket pecking order of the biggest tech giants in the US?  It has certainly happened before, and not that long ago. 

IBM, once the top dog in PCs,  was overtaken in terms of market cap by Microsoft in 1996. Apple overtook Microsoft in 2011, and surpassed everyone (notably oil giant Exxon Mobil) to become the biggest company on the planet in 2012.  

Will Google or Facebook be the next one to climb up the ranks? Who knows. Every time Apple is written off, it seems to come back with a vengeance. 

If we've learned anything in tech in recent years it's to expect the unexpected.