Updated Jan. 28, 2014 6:42 p.m. ET
Apple AAPL -7.99% Apple Inc. U.S.: Nasdaq $506.50 -44.00 -7.99% Jan. 28, 2014 4:00 pm Volume (Delayed 15m) : 36.94M AFTER HOURS $508.50 +2.00 +0.39% Jan. 28, 2014 7:59 pm Volume (Delayed 15m): 1.18M P/E Ratio 12.48 Market Cap $491.35 Billion Dividend Yield 2.41% Rev. per Employee $2,166,110 01/28/14 HEARD ON THE STREET: Apple's N... 01/28/14 Apple Shares Hit Three-Month L... 01/28/14 Apple's Drop, By the Numbers More quote details and news » faces a midlife crisis.
Thanks to the phenomenal success of its iPhones, Apple is no longer a lean upstart with unbridled growth potential. Yet given its record of innovation and penchant for disrupting industries, it is also far from being a has-been.
This dual identity has left the company's stock adrift, buffeted by the hopes of fans confident in Apple's ability to create yet another killer product and those who believe it makes more sense to simply return hoards of capital. In just the past year, the shares have troughed at about $385 and crested around $575.
On Tuesday, Apple's shares fell nearly 8%, to $506.50 each, following its earnings report late Monday showing iPhone shipments failed to meet expectations in its fiscal first quarter ended in December. The disappointment underscores Apple's reliance on iPhones and the need for it to unveil new products that will rejuvenate the company.
Little is known about such products, and Apple isn't likely to offer many clues until this summer. Activist investor Carl Icahn is already calling for the company to borrow money to buy back more of its stock.
But if Apple is to convince investors its days of growth aren't behind it, chief Tim Cook should resist calls to take a course of action more suitable for Exxon Mobil. Product innovation, not financial engineering, will remain key to Apple's long-term success.
Granted, whether Apple launches a smartwatch or another device, it remains dependent on a single product line. The iPhone generated more than $91 billion in sales in Apple's last fiscal year—more than half the total. The device is also very profitable: Gene Munster of Piper Jaffray estimates it accounted for about 70% of Apple's total profit in the December quarter.
That makes it hard to replace in Apple's sales mix in a way that maintains high margins while providing meaningful growth. Apple has averaged 40% revenue growth in the last three fiscal years. To get just 20% now would require adding $35 billion in revenue this year. That was about its revenue base just five years ago.
A big selling point for Apple's stock remains its low valuation at about 11 times forward earnings. This leads to an interesting, and unflattering, comparison with archrival Google. GOOG +1.98% Google Inc. Cl A U.S.: Nasdaq $1123.01 +21.78 +1.98% Jan. 28, 2014 4:00 pm Volume (Delayed 15m) : 2.17M AFTER HOURS $1132.00 +8.99 +0.80% Jan. 28, 2014 7:59 pm Volume (Delayed 15m): 48,153 P/E Ratio 31.84 Market Cap $367.91 Billion Dividend Yield N/A Rev. per Employee $1,059,710 01/28/14 Yahoo's Revenue Keeps Sliding 01/28/14 Online Memorial Services: Afte... 01/28/14 Google in Deal With VSP Global... More quote details and news » Despite running at similar multiples in mid-2012, Google's shares now trade at a significant premium to Apple's, at about 21 times.
Google's core advertising business still has clear ways to grow that are transparent to investors: taking share from other forms of advertising, such as the shift from traditional media to mobile, and growing alongside the global economy. Furthermore, this is a year-round, consistent business, as opposed to Apple's, whose sales have become more concentrated around its product launches.
Plus, Google has many irons in the fire and essentially offers investors cheap options on the possible success of offerings such as wearable devices.
Thus Apple's dilemma remains. Protecting margins while kicking back cash is a way to grow old gracefully. But for Apple's shares to regain some luster, the company needs to prove it can once again play the young turk.
Write to Dan Gallagher at dgallagher@marketwatch.com
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