Growth

Apple and Google: Slouching Toward Steady Profits


The Apple store in New York's Grand Central Station

Photograph by Spencer Platt/Getty Images

The Apple store in New York's Grand Central Station

Here’s the thing about perpetual-motion machines: They don’t exist. That’s worth considering during all the hand-wringing surrounding earnings announcements from Apple (AAPL) and Google (GOOG).

Apple’s stock is currently down around $504—a far cry from its high of $705 back in September 2012. Investors are worried that earnings may slip by around 2 percent, indicating a slowdown in demand for Apple’s products. Concern is greatest around Apple’s iPhone, the sale of which contributes more than half of the company’s revenue and profits.

If demand for the iPhone is slowing—particularly in the United States—it’s because that most people who want one probably have one. Somewhere between 50 and 60 percent of U.S. mobile phone users already have a smartphone. Of those people, around 53 percent have an iPhone, according to market researcher Kantar Worldmedia ComTech.

And so, momentum slows. Look beyond the U.S., and Apple has some potential in similarly wealthy markets: In Europe, its market share is a considerably lower 25.3 percent, which trails market leader Samsung by 19 points. But the real potential lies in places where the iPhone is just getting started—China, India and other developing markets. The problem, however, is that the iPhone itself is an expensive device: We pay $199 and up for it, but that’s because the handset’s cost is subsidized by the carriers. In other parts of the world, you buy the handset at full price, making the iPhone’s unsubsidized price of $649 and up prohibitive.

Maybe Apple can create a lower-priced phone for those international markets. Maybe it can create another industry-making device, the way the iPod basically created the music-player market, the iPhone revolutionized the smartphone market and the iPad upended the tablet market. Maybe that’s the much-rumored successor to Apple TV.

But there is also the possibility that none of those things will happen—or will have the desired effect that some investors seem to be looking for. And if that’s the case, then Apple will be simply a wildly profitable company that continues to be a major (or dominant) player in various product categories.

Google’s in a different situation, but there’s anxiety about its future earnings potential as well (even though the company beat estimates Tuesday, posting fourth-quarter profit at $10.65 a share; estimates were around $10.50 a share). The company made its bones–and billions of dollars–in desktop search, but the game has moved to mobile, and Google has to retool for that. Creating the Android operating system was one step to adapt—it’s a bank shot that hopes that creating a mobile operating system will draw more people into mobile browsing, which will in turn send more users and data to Google’s online services. Unfortunately, mobile advertising remains a challenge, if for no other reason than the fact that a mobile screen is small, so where do you put all those ads?

Buying Motorola was another way for Google to readjust. It would appear to be an admission from Mountain View that Apple’s method of designing software and hardware together yields greater benefits than entrusting it to third-party device manufacturers. But Motorola hasn’t yet paid off—none of its devices have really caught on with consumers, and unwinding non-essential businesses from the core handset operation has caused confusion among analysts and other company watchers.

And now Google has to contend with search features from its archrival, Facebook (FB). If Facebook’s Social Graph search is successful, which depends on Facebook users sharing more and more data about what they like, it could prove a more accurate—and therefore more valuable—search service than Google’s keyword-search method.

With both companies, there’s worry that the days of fabulous growth are rapidly fading into the past. Thing is, that may well be true, but it was bound to happen. At some point in a growth company’s life, it’s going to become a value stock. Issuing a dividend, which Apple started in October, is not an admission of defeat. It’s a way to return some of your earnings to shareholders, which is at the core of why people invest in a company to begin with.

The fear is that companies like Apple and Google will go in the direction of Microsoft (MSFT)—an otherwise wealthy company that drifts toward irrelevance. But there’s a big difference there: Microsoft’s troubles stem from an inability to penetrate key markets like tablets and mobile, while still dominating the desktop and gaming markets, to say nothing of enterprise software. Google and Apple are already big players in those markets. It may be that they continue to be steadily profitable in years to come. How boring.

Grobart is a senior writer for Bloomberg Businessweek and the managing editor of Bloomberg Digital Video. Follow him on Twitter @samgrobart.

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Companies Mentioned

  • AAPL
    (Apple Inc)
    • $102.64 USD
    • 1.58
    • 1.54%
  • GOOG
    (Google Inc)
    • $581.13 USD
    • -6.24
    • -1.07%
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