Apple to its core
Last week, Apple officially became the most profitable company in history. Over the last three months of 2014, the technology giant sold an incredible 34,000 iPhones per hour, 24 hours a day, helping to generate $75 billion in sales and making $18 billion (£12 billion) in profit. This represented profit growth of 37%, and this period was – as described by Katy Huberty at Morgan Stanley, ‘a quarter for the record books’.
Apple now has cash reserves of $178 billion, and its share price leapt 5% following the announcement of the result, closing at $117 on Friday. This was helped, in part, by Apple’s tendency to downplay expectations of its profits reports prior to quarterly announcements, surprising investors and maximising the share price jump.
This is an incredible achievement from the firm that Steve Jobs saved from the brink of bankruptcy. However, it does leave investors wondering just how long Apple could possibly maintain this level of growth. Surely, at some point, the world will run out of people who want iPhones. Even chief executive Tim Cook has described the demand for iPhones as ‘staggering’ and ‘hard to comprehend’.
It’s worth noting that Apple’s success is centred on the iPhone. Its smartphones generated more than two thirds of its revenue last quarter, as iPad sales actually decreased in the same period. That iPhone growth is centred on China, where demand has exploded over the past year.
To put this in perspective, in October 2013 Apple was only the sixth biggest smartphone company in China, and now it’s number one. To do this, it has had to take on one of its biggest rivals, Xiaomi, which for years had been routinely referred to as ‘the Apple of China’ and is more than capable of drumming up the same kind of hype and consumer excitement. Indeed, Xiaomi is unlikely to simply roll over and admit defeat, and it can point to the 220 million reservations of its recent Mi Note phablet, which sold out on its first day of release.
Xiaomi will be launching more new products over the coming weeks, and it’s aiming to sell at least 100 million smartphones this year as part of a fight back against both Apple and its other main rival, Samsung. Samsung surpassed Apple as the world’s number one smartphone provider in 2011, although it has never reached Apple’s levels of profitability.
This reflects one of the most notable aspects of Apple’s strategy, which is to resist chasing its rivals to the low end of the market. Wherever Apple have fallen behind in terms of sales volumes, they have still been consistently selling more high value products, and thereby making higher profits from a smaller number of sales.
One thing that investors and commentators seem to agree on is that the Apple Watch – scheduled for an April release – would be a substantial setback if received negatively. For a business that bills itself as an innovator, Apple has not launched a genuinely new product since the iPad way back in 2010, and it has allowed other companies to steal a lead on the burgeoning market for wearable devices.
In April, all eyes will once again be on Apple to see just how long their success can continue.