Why Apple Growth Could Surprise to the Upside
Apple has experienced a material deceleration in growth over the last quarters, Wall Street has been widely disappointed by this, and the stock price has suffered as a consequence. On the other hand, there are good reasons to believe the company could surprise to the upside in the middle and long term.
The Android attack
According to data from IDC, Android has a market share of nearly 80% in global smartphones platforms. Even as hardware manufacturers like Samsung and HTC have done their part by providing competitive hardware and technologies at conveniently low prices, the real game changer in the industry has been Google with its Android operating system.
Google has been venturing into hardware lately, but the company's business model relies heavily on advertising. The online search giant simply wants to make sure that its software and applications remain dominant when it comes to mobile traffic in order to capitalize the advertising opportunities that come with it.
That's why Google makes its enormously popular operating system and applications freely available for different manufacturers. Ecosystem depth is a major competitive force in the industry, and Android makes it possible for the likes of Samsung, HTC, or even Google itself to build cheaper product alternatives which are considered "good enough" by many consumers.
This is especially important in emerging markets, where cost considerations are more determinant, and Android will most likely continue leading the industry in those countries over the next years.
The tasty Apple
On the other hand, losing market share on the low end of the pricing spectrum doesn't necessarily mean stagnant growth rates for Apple over the middle term.
To put things into perspective, the company sold 31.2 million iPhones during the last quarter, a 20% increase versus 26 million units sold in the same quarter of 2012. Not bad at all for a gigantic business unit like the iPhone and considering that many consumers were still waiting for the new iPhone versions.
The new models are also off to a strong start, Apple sold a record-breaking 9 million new iPhone 5s and iPhone 5c devices in the first three days following their launch, and some analysts have been adjusting their sales estimates to the upside lately. The iPhone is Apple's biggest and most profitable product, so this has a considerable financial impact on the company.
The iPad is also facing increased competition from Android products, but tablets are still a high growth category stealing market share away from PCs, so there is still ample room for different companies to continue growing in that segment. Besides, Apple has alternatives like the iPad Mini to compete more effectively when it comes to price.
The iTunes/Software/Services business generated $3.99 billion in revenue for Apple in the last quarter. That is a relatively small fraction of total sales for a company with more than $35.3 billion in revenues for the quarter, but it's a huge business on a stand-alone basis. For that matter, iTunes is already bigger than most media and entertainment companies in the world.
More importantly, the segment is growing at 25% annually and becoming an increasingly bigger part of the equation. According to Apple, users have downloaded more than 1 billion TV episodes and 390 million movies from iTunes to date, and they are purchasing over 800,000 TV episodes and 350,000 movies per day.
Movies and TV shows have considerably higher prices than the typical $1 per song the company charges for music, so iTunes could see a big boost in sales and profitability as users continue buying more video in the middle term.
Tim Cook has repeatedly said that the company is working on new product categories, and the company has stepped up its R&D expenditures lately. Research and development expenditures increased by 34.5% to $1.178 billion in the last quarter, so the company is putting its money where its mouth is.
It´s hard to tell with any certainty what kinds of products Apple is planning to launch, when it will do it, and what kind of impact that could have on the company's growth rates. But coming from such a successful company and supported by the most valuable brand in the world according to the latest Interbrand ranking, both consumers and investors have good reasons to keep their expectations high.
The iPhone is doing better than many expected, tablets are still a young product category, and the iTunes, Software and Services business is firing on all cylinders. In addition to that, Apple is actively working on new product categories. It seems like rumors about Apple's death have been greatly exaggerated.
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The article Why Apple Growth Could Surprise to the Upside originally appeared on Fool.com.Andres Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.