Apple, Goldman and the Fear of Falling
By every measure that counts, Apple had an extraordinary quarter. It’s currently the best performing technology bellwether, and tech is arguably the hottest place for investors to be right now. Apple’s revenue and growth trounce those of other hardware makers like Dell and Hewlett-Packard. And it’s wildly profitable, all while growing at breakneck speed.
The planet's most admired gadget maker is the rare company that can outperform its competitors by such wide margins. Three months ago it reported the most profitable quarter ever achieved by a publicly traded company. Its market cap has soared past $700 billion, which makes Apple the most highly valued company in the world. Not bad for a nearly 40-year-old tech company that started out selling home PC kits.
It all reminds me of the spring of 2008.
Back then, Goldman Sachs stood at the pinnacle of the financial services industry, a business that was an important driver of U.S. and global economic growth. Goldman had posted record revenue of $46 billion in 2007, earning $11.4 billion along the way, according to Bloomberg data.
An epic financial crisis soon ensued, of course, and Goldman's revenue, stock price and reputation all slumped. Goldman remains a vibrant Wall Street player and its fortunes have rebounded in recent years, but it has yet to fully revisit the heights it once occupied several years ago.
When companies achieve the kind of dominance Goldman once enjoyed, they can seem invincible. But they're actually quite vulnerable because they not only have to perform well, but also at a level that's almost impossible to sustain for long periods of time.
In a Fortune feature from 2008, ominously titled “The Man Who Must Keep Goldman Growing,” the firm's chief executive, Lloyd Blankfein, was hyper-aware of the challenges ahead. He fretted over the odds of a business like his hitting the shoals -- 9 percent if you performed poorly, 3 percent if you were really good, and (presciently) 100 percent if a crisis hit and all hell broke loose. As Fortune put it, Blankfein at the time didn't want to be "the Goldman chief who falls off the tightrope.”
Apple CEO Tim Cook doesn’t seem like a Blankfein-type worrier. In fact, he came across as cool and confident during the company’s earnings call this week. But the question remains of how he’ll continue to fuel growth at his juggernaut, which has grown in size, earnings and position that is light-years beyond anything that Goldman ever achieved.
This week Apple said that its quarterly net income soared 33 percent to $13.6 billion -- much more than Goldman has earned in any year except for 2007 and 2009. Revenue in the quarter rose 27 percent to $58 billion. Apple upped its capital-return program and increased its dividend by 11 percent. If iPhone 6 and iPhone 6 Plus demand continues apace, Apple could report its highest annual profit since 2012.
Angelo Zino, an equity analyst at S&P Capital IQ, thinks that Apple has done remarkably well -- but he still has a "hold" rating on the stock. Zino agrees that as companies climb higher it gets harder for them to continue to beat, or even meet, expectations. He says that at some point Apple’s topline growth will decelerate. It will get harder for Apple do better than it did the year before, especially as it racks up record quarter after record quarter.
I can’t say with any certainty when things will slow down for Apple. But there are pivotal areas to watch as it figures out how to manage the risks that come with being at the top of the heap.
China could emerge as the company’s most important relationship to watch. Apple said that last quarter’s iPhone sales in China were greater than in the U.S. for the first time. IDC analyst Crawford Del Prete said during an appearance on Bloomberg West that going forward it will be hard to envision a time when China isn’t the company’s biggest customer.
All well and good, but this also could make Apple vulnerable to vicissitudes in China’s economy and to a government that wants security concessions from tech companies that do business within its borders. While Apple is known for being a staunch advocate of consumer privacy, it also has a massive supply chain operation that relies on Chinese labor -- creating a recipe for a very complicated relationship.
White-hot iPhone sales have tabled the question of Apple's product diversity for now, but that doesn’t mean the question is moot. Zino points out that global smart phone sales growth industrywide is slowing down from north of 25 percent last year to somewhere in the low teens this year.
It also looks unlikely that the iPad will ever be a big product for Apple. The device currently accounts for about 9 percent of Apple's revenue, and the company reported in the quarter that iPad sales are falling. Even when larger-screen models are introduced, which should happen later this year, Apple may not see sustained sales growth for the tablets.
For now, Apple Watch's fortunes are still tied to iPhone proliferation. An Apple car is still a dream. It's still unclear if Apple can do something compelling in television. During the recent earnings call, Cook mentioned his company’s work with HBO and said that he wants Apple to take part in the "major, major changes in media" that are under way. Apple is also working on music streaming as it ingests and transforms Beats.
I’m interested to see whether Apple builds a robust software business on top of what it already has engineered. Software has always been seen as a way to keep consumers in the Apple product ecosystem, and not much more. But now the company has Apple Pay, Health Kit and Beats for music streaming. These could be robust platforms in lucrative businesses such as payments, health care and entertainment. But whether that comes to pass is also yet to be seen.
Apple sits atop an enviable stockpile of cash and has been shrewd about how it manages its finances. It has been borrowing billions of dollars -- at rock-bottom rates -- to buy back stock and issue dividends, a strategy it will continue to use. From August 2012 through March 2015, the company returned more than $112 billion to shareholders, including $80 billion in buybacks.
Zino sees ongoing annual dividend increases at Apple of between 8 percent and 10 percent, as well as $140 billion in share repurchases, through 2017. What happens after that? If the pace of buybacks and dividends changes, will the activist investors come out to agitate?
Apple may never endure a crisis of Goldman-like proportions, one in which a global financial calamity threatens to decimate the company’s business lines. Yet Apple is also clearly, admirably and perilously occupying a summit with which Goldman is familiar. And it’s not easy to stay on top.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the editor on this story:
Timothy L. O'Brien at email@example.com