• The Washington Post


By almost any measure, Apple Inc. had an awfully good start to the year.

It sold $43.6 billion worth of products, a record for this time of year, and earned $9.5 billion. It sold 7 percent more iPhones than a year ago and 65 percent more iPads, and recorded 30 percent more revenue from iTunes, software and service sales. It had $12.1 billion in cash in its accounts and $105.6 billion in liquid securities. The company said it will more than double the amount of that lucre it returns to shareholders in the form of share buybacks and dividends.

These should be the best of times in Cupertino. But while things in many ways look good for Apple, they are looking considerably less so for AAPL — the firm’s Nasdaq ticket symbol. Shares of the widely held stock are off 43 percent since its September high. And the reasons why tell us something about business and innovation.

Apple’s soaring profitability over the last decade has been driven by a series of wildly successful new products: First the iPod, then the iPhone, then the iPad.

Each of those products has followed a cycle: Brilliant innovation, followed by explosive growth in sales, paired with profit margins that make other makers of consumer technology products drool, followed by a leveling off of sales, an onslaught of new competition as rivals catch up in quality, downward pressure on margins, the end.

The reason Apple is the nation’s greatest corporate success story of the last decade is that as that pattern has run its course, it has always had a new bold idea on the horizon to repeat the cycle.

But the thing is, products that change the way people live and are rapidly adopted by millions of people don’t come along every day. Even Steve Jobs, likely the greatest innovator of his generation, arguably only really had four consumer products that were that revolutionary: The original Macintosh computer, the iPod, iPhone and iPad.

Almost by definition, products that could live up to the success of those predecessors are going to be hard to imagine. If it were easy to imagine them, somebody would have already made them. Apple is looking to revolutionize TV, but success is no slam-dunk. It has shown less public interest in plowing money into projects far outside of its core expertise than some tech giants, in particular Google Inc., which is chasing driverless cars.

So Apple’s stock price is essentially a minute-by-minute referendum on the company’s ability to find some big new thing that will drive profits over the coming years. At its current price of around $400 a share, investors are betting that the answer is “no,” that while Apple will still make plenty of money from making iPhones, Macs, and other products to come, there will be no explosive growth out of the company based on the newest new thing.

Its stock price to earnings ratio is 9.6, meaning that every $1,000 worth of Apple stock you buy gets you $104 in annual earnings power. That’s the kind of number you would expect to see on a company in a declining industry, not a titan of technology. By contrast, the same investment Caterpillar Inc. buys you $89 in earnings, implying the market expects better earnings growth from the construction equipment maker than from the iPhone maker.

The reason Apple stock was down Wednesday despite reporting better-than-expected profits is that investors view the company’s decision to return more money to shareholders as a tacit acknowledgement that they don’t have major investment opportunities on the horizon: You only need a $100 billion horde if you have something to spend it on, and if you don’t, you may as well give it to the shareholders.

Innovation is a curious thing.

While of course it takes armies of engineers and programmers to make a product like the iPhone work, it was paired with the singular vision of a Steve Jobs to corral the work of those engineers into a product that transformed how people live their lives.

The market’s pessimism about Apple’s future profitability is a bet that true, world-changing innovations like the ones that kept the firm wildly profitable in the past decade don’t come around every couple of years, and are more rooted in the brain of one exceptional individual rather than in the organization he created and led.

There is every reason to think Apple will continue to be a highly profitable company in the years ahead and continue to make excellent products. But to grow from here, it will need a type of spark of inspiration that, even for a Steve Jobs, was a rare thing indeed.

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