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It is paradoxical that the world’s largest company is experiencing a decline in growth. Apple has now reported three consecutive quarters of revenue decline and does not anticipate a change in the current quarter. Sales for the full year are expected to drop by approximately 3%.
Apple’s flagship product, the iPhone, saw a decline of over 2% in sales compared to the previous year. Despite this, the company’s $3 trillion valuation reflects high expectations.
However, Apple’s services division, which includes the App Store, Apple TV+, and other digital subscriptions, continues to grow. This division boasts gross margins of nearly 71%.
The revenue from Apple’s extensive base of devices is driving growth in its services division. In the last quarter, service revenues increased by 8% and accounted for over a quarter of the total revenue.
As a mature hardware business, Apple’s growth driven by innovation has significantly slowed down. The release of the new Vision Pro virtual reality headset could potentially boost sales, but this is not guaranteed. Apple now relies on price increases or expansion to drive hardware revenue.
In light of the declining revenue, it is questionable whether Apple’s valuation, which is 30 times the forecasted earnings, is justified. This seems overly optimistic for a company that has experienced falling revenue and relied on cost-cutting measures to maintain net income.
However, the potential answer lies in artificial intelligence. Despite their reputation for prudence, Apple has reported an increase in research and development costs. In the current fiscal year, they have allocated nearly $23 billion to R&D, compared to $19.5 billion in the previous year. This represents almost 8% of the revenue, up from 5% in 2018.
While Apple has not introduced new AI-enhanced services to customers this year like Microsoft and Alphabet, CEO Tim Cook stated that the company has been researching various AI technologies, including generative AI, for several years.
Could an Apple chatbot be in the pipeline? If Apple were to charge for access, their service revenue would skyrocket.
The Lex team would love to hear your thoughts on Apple’s numbers. Please share your comments below.
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