Apple (AAPL) announced on Wednesday that it sold almost 48 million iPhones last quarter, and yet the company’s shares have been cratering ever since. How to explain this seeming paradox? Benedict Evans, a strategy consultant for Enders Analysis, gives it his best shot and essentially concludes that Apple has reached the point where it’s gotten so big that investors are understandably worried about whether it has any room to grow any further at its current margins.
“How many more people are left who can buy a $650 phone (or even a $400 one) every 24 months?” Evans asks. “Is growth almost over? This in turn leads inexorably to the much argued-over ‘cheap phone’ issue, and how margin-dilutive such a phone might be. As an investor, therefore, are you buying a company with high growth and continued high profits, slowing growth and the same high profits, or the same growth and (due to cheaper products) lower profit? It really isn’t clear. More cynically, this is a catch 22: high numbers mean saturation (bad), and low numbers mean slowing growth (bad).”
Another way of looking at this is that investors may want Apple to deliver two contradictory things: They want Apple to expand its market share by releasing a cheaper iPhone on the one hand while demanding that the company maintain its historic margins on the other. Needless to say, such a fete will be hard to achieve unless Apple somehow figures out how to make a working iPhone out of cardboard that people will buy for $120 a pop.
Evans notes that this Catch-22 has led Apple to “the point where all news is bad news,” since the only way for its stock price to continue rising is to replicate its skyrocketing growth from the past several years. And since the rise of Samsung (005930) and other low-cost Android smartphone vendors has forced Apple to adhere to the laws of economic gravity again, that sort of growth doesn’t right now seem likely.