Apple is reportedly looking into wearable devices such as next-gen watches, but the development is just one more sign that the company is maturing and needs some new tricks.
The big news Sunday into Monday---and rumored before---is that Apple is testing a smart watch. This smart watch would apparently go nicely with Apple's television set that has been rumored to change the world.
These new markets for Apple illustrate what has Wall Street a bit worried these days: What can Apple do as its next trick?
Here's why answering that question is such a big deal: Apple is projected to report fiscal 2013 net income of $42.2 billion on revenue of $183.1 billion. In fiscal 2014, analysts currently expect Apple to report net income of $48.1 billion on revenue of $207.2 billion. In 2015, Wall Street analysts project Apple to report net income of $52.45 billion on revenue of $235.76 billion. For what it's worth, IBM is projected to report net income of $20 billion on revenue of $111.2 billion in 2015.
Apple's 2015 estimates are apparently from analysts ballsy enough to think they can really see the future. In any case, you get the idea. Apple is expected to always be perfect, always find new markets and always manage market transitions well. Some of these expectations are earned since Apple's iPod begat the iPhone, which begat the iPad. Nevertheless, these expectations might just border on ridiculous.
So what's Apple going to do? The short answer is that it will have to play Wall Street's game somewhat. Apple will have to hone its message. It will also have to dish out more cash to keep investors interested. Why? The reality is that it may be impossible for Apple to meet expectations.
In a research note Monday, Barclays analyst Ben Reitzes pondered what would Apple say if it held an analyst day. Apple last had an analyst day in 2003 and having another would signal that the company has reached maturity. After all, mature companies tell Wall Street what's going to happen so analysts don't go crazy.
Reitzes noted that investors need guidance from Apple about its business model and steady returns. He said:
Over time other great American companies, like IBM, have come to realize this fact as well – leadership in the stock market creates an aura around the company. IBM perhaps spends the most time in our sector honing its message and asking shareholders what they want to see – and actually listening. The company has constructed a board of mostly industrial company heavyweights and seems to get the most it possibly can out of its business model.
In reality, the IBM as we know it today took several years to create – even after the departure of Lou Gerstner. Investors won’t be so patient with Apple in our opinion. No company has accumulated this kind of cash or garnered this much attention in history. We know it is not Apple’s style to conduct itself like IBM. However, we believe that Apple can convey a philosophy and guidance that maintains its secrecy and mystique.
I agree that Apple is in a tough pickle. Sans some uber product categories Apple won't be able to keep its pace up enough to satisfy everyone who bought shares. Frankly, it's a shame, but we've all seen this set-up before.
What would Reitzes want to hear from Apple's analyst day? He said the first topic would be the plan to be a platform company. That question is huge given Google is a platform and cloud play. Apple's cloud history could be better.
One could argue that Apple’s shares hit an inflection point to the downside in September 2012 when investors realized that the Apple Maps endeavor was a significant mistake. The maps debacle showed investors how valuable Google’s technology was – how hard it was to replicate – and how Apple may struggle as the world moves beyond iTunes toward cloud based services. In short, we believe Apple needs to up its game in this arena.
Reitzes added that Apple should outline its total addressable market. Would Apple make cars? Smart clothes? What could the Apple brand really do?
The other items on Reitzes list are standard fare. Naturally, he wants to hear about gross margins, views on distributing cash and how Apple sees its competition.
Luckily for Apple, CEO Tim Cook appears to know the game he has to play regarding expectations. First, Cook is open to distributing Apple's pile of cash. And second, Cook came from IBM so gets the Wall Street jig. Finally, Cook gets the enterprise game, which can provide another leg of growth while the masses are pondering low margin gear like watches and TVs.
In the end, Apple's next great feat may have nothing to do with new products. Should the company be able to navigate lofty expectations---or even top them---Apple will be a business case study for the ages.