Why Apple's Killer Quarter Puts Pressure on iPad 3, iPhone 5

Analysis

 @redletterdave
on January 27 2012 3:56 PM
Apple stocks should be trading at much higher prices given the company's astounding growth and huge cash hoard
Apple stocks should be trading at much higher prices given the company's astounding growth and huge cash hoard Reuters

On Tuesday, CEO Tim Cook announced Apple's record-breaking Q1 2012 earnings, claiming $46.33 billion overall, $13.1 billion in profit and $17.5 billion in cash for the quarter that ended Dec. 31, 2011. The final 14 weeks of 2011 proved to be the most successful quarter in Apple's 35-year history, so why should the company be worried?

Apple hype in late 2011 reached at an all-time peak, thanks to the release of iPhone 4S and its voice-activated AI tool Siri, and the death of the company's co-founder, chairman and visionary, Steve Jobs. For the December quarter, Apple sold 37 million iPhones, 15.4 million iPads and 5.2 million Macs. It's a stunning achievement for a company that was dead in the water 15 years ago, but now, the Cupertino, Calif.-based company must find innovative ways to maintain and outdo this killer success.

The Steve Jobs Effect

Except for the iPhone 4S, the products weren't selling themselves this quarter; Apple had a lot of help from outside hype, especially with interest surrounding Steve Jobs at an all-time high. When Jobs died on Oct. 5, just one day after Apple unveiled the iPhone 4S, thoughts and prayers for Jobs almost shut down Twitter, with users publishing nearly 6,049 tweets per second about the late innovator. Bill Gates, Mark Zuckerberg and even President Barack Obama offered their condolences, among hundreds of thousands of others.

The death of Apple's charismatic co-founder sparked even more interest in Apple than ever before. Jobs' biographer Walter Isaacson rushed to get his book out earlier, and despite releasing it in late October, Steve Jobs became Amazon's top-selling book in all of 2011, selling 379,000 copies in its first week of release alone. Jobs' name was a trending topic through the end of the year, with various people erecting statues, making toys and releasing never-before-seen documentaries in his name. Apple, possibly Jobs' finest creation, was suddenly untouchable.

The Hype Machine

With iPad 2 and the new iPhone 4S at the top of many wish lists, Apple enjoyed a tremendous holiday season. The company broke its single-day sales record on Black Friday (Nov. 25), reaching its projected forecast by 7 p.m. and far exceeding those figures by the end of the day. While its product discounts were far from extraordinary, Apple again offered free shipping for all its products, as well as free engravings on the back of its iOS devices. Coupled with the fact that Apple rarely doles out discounts, consumers jumped at a chance to own Apple's stylish devices. Apple was the fifth-most visited online retail store that day, behind Amazon, Wal-Mart, Best buy and Target.

The company's bestselling item was the iPhone, which got a boost from the 4S-exclusive feature Siri. In the quarter, Apple sold two million more smartphones than Samsung, the company's prime competitor, shipped.

We're thrilled with our outstanding results and record-breaking sales of iPhones, iPads and Macs, Cook said. Apple's momentum is incredibly strong, and we have some amazing new products in the pipeline.

In the public's eyes, Apple can do no wrong. With its recent slew of consecutive successes, including the iPad 2, iPhone 4S, and iBooks 2 platform, the public is becoming accustomed to Apple's dominance in technology, which is a curse disguised as a blessing.

The pressure's on at Apple to innovate, innovate, innovate. The next few products in the pipeline still had the Steve Jobs stamp of approval, but the training wheels are about to fall off, and we'll get to see if Apple can steady its forward momentum.

Apple was once forced to survive without Steve Jobs when it ousted him in 1985, but that move resulted in misery for Apple for the next decade. Walter Isaacson describes a Jobs-less Apple Computer:

By 1996 Apple's share of the market had fallen to 4% from a high of 16% in the late 1980s, Isaacson wrote. Michael Spindler, the German-born chief of Apple's European operations who had replaced [John] Scully as CEO in 1993, tried to sell the company to Sun [Microsystems], IBM, and Hewlett-Packard. That failed, and he was ousted in February 1996 and replaced by Gil Amelio, a research engineer who was CEO of National Semiconductor. During his first year the company lost $1 billion, and the stock price, which had been $70 in 1991, fell to $14, even as the tech bubble was pushing other stocks into the stratosphere.

The company had good ideas, but there was a distinct inability to execute a product with vision in the same way Jobs always could. When Jobs took his rightful place as CEO in 1997, the company invented the iMac, iPod, iPhone, and iPad, among other products.

How iPad 3 and iPhone 5 Can Maintain Momentum

Now that Apple is on top of the world, the company must be more creative than ever to assure their numbers keep escalating. Apple's CFO Peter Oppenheimer was smart to low-ball his second quarter predictions, but the company will need products and features as unique as Siri to keep rivals at bay like Google and Samsung, which are closing fast on Apple's lead in the market.

Sources from Apple's foreign supply chains in China and Taiwan said they have already begun production on the company's next iPad, presumably called iPad 3, and a Foxconn employee said his factory is gearing up to begin production on the next iPhone. The iPad 3 is said to double the display resolution and the iPhone 5 is believed to have a bigger screen size, but besides hardware upgrades, little is known about the software on the future devices.

While Apple has said absolutely nothing about the iPad 3 and iPhone 5, hype about the two mystery iOS devices is reaching a fever pitch, just as it did in October. Apple has always been about excellence in its products, but without Jobs' presence, the company will need to be very careful about what they release. If the iPad 3 is a disappointment, or if iPhone 5 doesn't live up to its expectations, it will only be compared to Apple's best quarter.

With the bar set so high, Apple now needs to beat itself each quarter, which will prove extremely difficult. While successful software helps the company's bottom line, most hype only builds around Apple's hardware offerings like the iPod, iPad and iPhone. Even though the iPhone 4S didn't live up to the hype of the iPhone 5 in October, that was only because consumers wanted a phone named iPhone 5. Fans got iPhone 5 in October, it just wasn't called the 5.

Regardless, Apple needs a miracle product, either in software or hardware, in order to enjoy a quarter as successful as its last one. Yet, odds are Apple can and will create such a miracle product, but we can't fathom it because we don't know we need it yet.

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