NEW YORK (Reuters Breakingviews) - Apple is playing some soothing iPhone hold music. The tech colossus sold nearly 51 million smartphones despite maturing markets and a resurgent Samsung following its exploding-battery crisis. App-store sales also grew nicely, and more dividends and buybacks are on the way. That should pacify investors until Apple rolls out the 10th anniversary edition of its pioneering device.
Smartphone sales for all vendors globally have slowed, to only about 4 percent in the first quarter, according to research outfit IDC. In one way, that’s a bad omen for $770 billion Apple. The iPhone generates more than 60 percent of its revenue and profit. At the same time, most customers have settled on either Android devices or Apple‘s.
Chief Executive Tim Cook is focused on milking these users in many ways. It’s selling them more apps, storage, support and music. This recurring source of revenue is expanding quickly, at an 18 percent pace in the latest quarter, and now accounts for 13 percent of total sales. The larger, albeit intermittent, opportunity is persuading customers to add watches and wireless earpods to go along with their iPhones. There’s also a steady need to replace cracked, waterlogged or ageing ones.
The biggest opportunity to extract cash from its devotees – and perhaps even to win over Android fans – is coming. Apple historically rolls out new iPhones in the autumn, and hints from the supply chain indicate it will be a big upgrade this time. That probably will help handset sales toward the end of the year, but also could mean lower revenue in the coming quarter as customers wait for the next iPhone iteration.
Apple shares have gained 27 percent since the start of the year, quadrupling the increase in the S&P 500 Index. Even after a dip in after-hours trading on Tuesday, the company still trades at about 16 times estimated 2017 earnings, a 15 percent discount to the broader market.
That seems excessive, given the power of the smartphone duopoly. What’s more, Apple is throwing off enough cash to fund nearly $90 billion of additional capital returns by the end of March 2019 with plenty stored up to keep investing in new products. There should be more than enough there to keep investors humming along as they wait for what’s next.
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