May 1, 2018 / 9:23 PM / 21 days ago

Breakingviews - Apple is bumping up against iPhone limits

NEW YORK (Reuters Breakingviews) - Apple is bumping up against its iPhone limits. The smartphone market is mature, and soft demand for the $1,000-plus X model suggests the company led by Tim Cook has maxed out on pricing. The company’s just-ended quarter - revenue rose 16 percent to $61.1 billion - shows Apple can still sell a lot of phones and more accessories and services. And a robust balance sheet means it plans to repurchase another $100 billion in shares and increase the dividend. But the lack of a hot product could start to test investors’ patience.

Tim Cook, CEO of Apple, speaks about the iPhone X during a launch event in Cupertino, California, U.S. September 12, 2017. REUTERS/Stephen Lam

The smartphone race is largely over, with Apple and Google’s Android operating system the winners. Global handset shipments declined 0.5 percent last year, estimates market-research firm IDC, and should grow less than 3 percent annually over the next five years. Apple might steal customers, but that’s a difficult task, and one that grows harder as the pace of technological progress slows. Apple sold only 3 percent more phones in the quarter compared with a year earlier, despite what it said were major improvements.

Apple has used design and branding to raise prices. The average price of an iPhone rose 11 percent from a year earlier in the latest quarter. That’s unusual in tech, as hardware prices tend to fall. But it’s questionable whether the Cupertino-based giant can go much higher. Average sales prices fell 9 percent from the preceding quarter, undershooting analysts’ estimates, presumably implying a lower ratio of Xs sold. 

The company can still wring more dollars out of buyers. Service revenue, which includes the app store, streaming music and online storage, rose 31 percent to $9.1 billion. Sales of “other products” also rose 38 percent to $4 billion, thanks at least in part to increased sales of things like headphones to iPhone users.

The shares jumped more than 3 percent in after-hours trading on Tuesday, yet excitable tech investors could lose interest in Apple’s comfortable – if capped – immediate future. Back in 2016, disappointment with the iPhone 6S sparked talk that Apple had lost its edge, and the stock underperformed the S&P 500 multiple for several quarters. Apple’s more generous payout to shareholders should take some of the sting out of any similar disenchantment today. But the company will face increasing pressure to show it has more tricks up its sleeve.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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