It appears that Apple is becoming a victim of its own success.
Tim Cook could be forgiven for shaking his head in disbelief last night, as Apple stock dropped by seven per cent in after-hours trading – despite posting a year-on-year increase in net profit of $3bn for the third quarter, increasing gross margin and posting record sales figures of the iPhone and Mac.
Apple sold 47.5m iPhones in the third quarter, a significant 35 per cent increase year-on-year.
However, analysts had expected the figure to top the 49m mark. With the acceleration of smartphone sales apparently slowing as saturation points in major markets approaches, eyes were on the two areas of Apple’s business which held the biggest potential for growth; sales in developing markets and the launch of the Apple Watch – Apple’s first foray into the wearables market.
International sales for Apple were strong, accounting for 64 per cent of the quarter’s revenue.
In particular, China was an area of strong growth, with sales more than doubling to $13.23bn year-on-year. This growth is significant, given the competition Apple faces in the market from competitors such as Huawei and Xiaomi, who offer similarly styled products (in the case of Xiaomi, almost identically styled) at a fraction of the cost.
The success of the Apple Watch launch was a point for debate, as (as expected) Apple chose not to disclose the total sales figures. Instead, these were lumped under the ‘other’ revenue category.
However, Apple chief financial officer Luca Maestri said that sales of the watch beat company expectations – indeed, in the nine weeks since the Apple Watches launch in late April, sales for the watch have outpaced iPhone and iPad sales. Apple is already claiming that the Apple Watch is a $1bn business.
In a day where Microsoft posted its largest ever quarterly loss of $3.2bn – mainly due to writing down the Nokia business, analysts were hesitant to back Apple, despite these promising figures. In fact, they felt that they highlighted the vulnerability of Apple’s dependence on the iPhone and on China as a growth market.
Colin Gillis, an analyst for BGC Partners told Reuters: "Where are you going to find growth in the world? 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?"
At Mindshare, we take a similar view. We see the rise of wearable technology as the ‘third wave’ of digital evolution – following the growth of PCs and smartphones. The smartphone market is maturing, and as it does so, sales of smartphones will slow. The next three months will be pivotal for Apple as Apple Pay rolls out in the UK, Apple Watch sales continue and the fruits of acquisitions such as Beats Audio are realised.
I anticipate to see continued year-on-year growth in the next quarter’s figures; however whether this growth will be sufficient to placate the investors, who have grown rich from backing Apple in the past, remains to be seen.
Neil Bruce is head of mobile at Mindshare