Technology trends can gain such momentum that they become unstoppable, offering spoils to the victors for years, even decades.
Eventually, however, dominant tech trends often reach a period where their prevalence just begs for a revolution, an overturning of the established order.
That’s the quandary Apple (ticker: AAPL) found itself in this week, as it sold another awesome 45.5 million iPhones, topping expectations, in its fiscal fourth quarter ended in September. The forecast for this quarter is even better, with revenue projected to rise more than expected.
But its shares sagged 2% on Wednesday, after Apple’s earnings report the night before, and ended the week down 2.5%. Despite decent expectations for the newly introduced iPhone 7 in the December quarter—and even better times ahead for what some speculate will be a radically different iPhone 8 a year from now—Wall Street is desperate to know what’s next after the iPhone.
Apple, and its chief competitor, Samsung Electronics (005930.Korea), still dominate the market for smartphones, with a collective 32% of units sold last quarter, according to research firm Strategy Analytics. Apple’s 12% share is still measurably ahead of the third, fourth, and fifth players. Both companies continue to crank out profits as the phone increasingly becomes a work tool as well as a lifestyle choice. It is a gadget whose dominance and relevance seems unstoppable.
And so, when confronted with OK but not stellar results, Wall Street asked Apple chief Tim Cook last week what’s next.
Morgan Stanley ’s Katy Huberty pointed out to Cook that research-and-development spending at Apple has more than doubled in the past three years, but sales growth has not seemed to reflect the investment. After the first annual revenue decline in 15 years, Huberty wanted to know: “Are R&D investments just less efficient than they were in the company’s history?”
Cook answered tersely that there’s a lot of R&D put into “products that are in the development phase.” Someone else raised the matter of television. All of Wall Street remembers when an actual TV set was supposed to be Apple’s next act. But the years have come and gone without a gleaming Apple TV set. Cook said last week that TV remains an area of “intense interest” for the company.
But two days after the report, Apple unveiled not a TV set per se, but a piece of software to run on its existing “Apple TV” set-top box that it calls “TV.” It is a guide that integrates the various video offerings streamed over the Internet. Nice, but hardly the piece of living-room furniture some had been hoping would be next.
ANY NUMBER OF OTHER THINGS have been tossed about, such as cars and a product to compete with Amazon.com ’s (AMZN) popular Echo home appliance. Analyst Steve Milunovich, perhaps expressing the general exasperation on the Street, told Cook that “some investors are antsy that Apple hasn’t acquired new profit pools or introduced a financially material new product in recent years.”
“The question is,” said Milunovich, “does Apple today have a grand strategy for what you want to do?” Cook’s response: “We have a strong sense of where things go.”
Maybe, but as the years stretch on without the giant new product category, the dominance of mobile seems as much a prison for Apple, from Wall Street’s perspective, as its constant triumph. As long as Apple keeps turning in amazing numbers based on the dominance of the iPhone—$9 billion in net income last quarter, and $16 billion in cash generated from operations in just three months—it’s hard to fault Tim Cook. But the shares, up 8% this year, seem to need something larger, some grander vision if they are to keep delivering in years to come.
ANOTHER TREND that isn’t slowing down is cloud computing, and last week’s earnings rush saw two great examples of that. Thursday night, Amazon and Google parent Alphabet (GOOGL) both reported earnings, with very different market responses. Amazon sank 5% on Friday, while Google rose fractionally. Amazon was punished for having poor margins because it has decided to spend more on things such as buying video for its Prime subscription service. That, and building warehouses: Its “fulfillment centers” saw square footage rise by 30%, year over year.
Google, on the other hand, was able to deliver admirable revenue growth of 20%. Moreover, its line item called “Other” on the income statement—the one that includes its YouTube service—rose by 39%. Google also announced a $7 billion stock buyback program, its first ever. Hence, Google was the steadier company, with a newfound interest in investor friendliness.
An area in which both shone brilliantly was the cloud. Amazon, widely regarded as the top dog in cloud-computing services by revenue, saw its Amazon Web Services sales rise by 55% from the prior-year period. Although that’s a figure that’s slowed a little bit each quarter, its still way above both the 26% growth in Amazon’s traditional North American e-commerce business and even the 28% in its overseas operations.
At $3.2 billion for the quarter, growing by more than 50% is quite impressive. Equally impressive, Amazon Web Services’ operating profit margin is rising. It was at 31.6% last quarter, compared with 25% a year earlier.
GOOGLE’S CLOUD services are smaller in size than Amazon’s, with the company generally ranked third or fourth in the market behind Microsoft (MSFT) or International Business Machines (IBM), depending on whose statistics you use. But analysts credited that 39% increase in Google’s other revenue in part to cloud, so it’s paying off.
Both companies, then, whatever their blemishes, are riding a wave of cloud computing that shows no signs of stopping, just as Microsoft did a week earlier with its strong showing in cloud. As was said in this space back in June, dominant companies aren’t disrupted every day, they tend to remain dominant for a long time, just as Intel (INTC) did in the PC era.
Asking what might be next after cloud is probably a bit like someone asking, at the end of the 1990s, what comes after the Internet: more Internet.
Unlike Apple, at least for now, the staying power of the cloud isn’t a prison for Amazon and Google. It’s an endless gift for their shares.