Apple has warned investors that future products may never be as profitable as its iPhone business as it explores untested new markets such as artificial intelligence and virtual reality headsets.
Image Source: Shyam Mishra/Unsplash
The manufacturer added a new caveat about factors that could affect sales growth and profitability in its latest financial report: “New products, services and technologies could replace or displace existing offerings and lead to declines in revenues and profits, which could have a material adverse effect on business, results of operations and financial condition.”
In its annual reports, the company traditionally warns investors about factors such as competition, currency fluctuations and supply chain issues that could cause volatility and squeezed margins. This year, Apple also added a warning about the possible impact of “geopolitical instability”—an item missing from its risk factors for several years—and about security risks associated with artificial intelligence. The announcement comes as Apple is investing heavily in its Vision Pro mixed reality headset, as well as Apple Intelligence, Siri and ChatGPT integration.
Gene Munster of Deepwater Asset Management noted that Apple is in a period of uncertainty as the company enters new product categories. For example, the Vision Pro headset, Apple’s first new device in years, costs $3,500 and is sold in limited quantities. Munster also asked how Apple plans to make money from artificial intelligence without charging for access to AI features.
It’s worth saying that Apple is also facing regulatory pressure regarding the App Store and other segments of its services business. In particular, the recent US antitrust victory over Google threatens to deprive Apple of billions of dollars in licensing fees it currently receives from the search giant as a partner.
Despite this data, Apple’s gross margin has grown from 33% in 2007, when the iPhone launched, to more than 40% by 2021. This happened because more and more customers are choosing expensive iPhone models, despite intense competition from manufacturers of cheaper devices.
We also note that Apple recently reported revenue growth of 6% to $94.9 billion for the quarter, with a record gross margin of 46.2%. However, most Wall Street analysts predict Apple’s gross margins will increase in the coming years, with an indicator of 49% by the end of the decade. The growth of Apple’s services business, which now generates about $100 billion a year, has also helped boost margins thanks to payments from Google to be the default search engine on iPhones. At the same time, the total margin of Apple services exceeds 70%, compared to 36-37% for hardware products. “This is an interesting time for Apple,” said Dan Newman, CEO of Futurum Group, noting that the company is worth about $3.4 trillion but is growing at an average rate.