Apple: follow the R&D money to where devices giant is headed

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It is incongruous that the largest company in the world is not growing. Apple has now reported three consecutive quarters of shrinking revenue. It does not expect that to change in the current quarter. Full-year sales are forecast to drop about 3 per cent. 

Sales of iPhones, the backbone of the US devices company, fell more than 2 per cent compared with last year. The $3tn valuation points to greater expectations.

The services division — the part of the business that encapsulates the App Store, Apple TV+ and other digital subscriptions — is still growing. This has gross margins of nearly 71 per cent.

Apple’s huge installed base of devices is buoying service revenues. These rose 8 per cent in the last quarter and account for more than a quarter of the total. 

Apple is now a mature hardware business. It is possible, though unlikely, that the release of the new Vision Pro virtual reality headset will unleash a wave of sales. But for the most part, innovation-spurred growth has fallen away. Apple must rely on price rises or expansion to lift hardware revenues. 

Without high growth, what can warrant a valuation that is 30 times forecast earnings? This seems wildly optimistic for a company with falling revenue that leaned on a curtailment of spending to keep net income up.

The answer may be artificial intelligence. Note that for all the talk of prudence, Apple reported an uptick in research and development costs. In the current fiscal year it has spent almost $23bn, up from $19.5bn the previous year. This is equal to nearly 8 per cent of revenue, compared with 5 per cent in 2018. 

Apple launched its voice assistant Siri more than a decade ago. Unlike Microsoft and Alphabet it has not rolled out new AI-enhanced services to customers this year. But chief executive Tim Cook said Apple had been doing research across a range of AI technologies, including generative AI, for years.

Perhaps an Apple chatbot is in the works. If the company charged for access, services revenue would soar.

The Lex team is interested in hearing more from readers. Please tell us what you think of Apple’s numbers in the comments section below