The world doesn't need another credit card, nor does it need more television shows.
Yet those are the most conspicuous new product offerings from Apple (AAPL) - Get Report this year. Even as the world gears up for a new iPhone next week, Cupertino has become decidedly dull in its ambitions, pedestrian in its aspirations. The giant gleaming donut of Apple HQ seems more and more inward-looking, fixated on the opportunity represented by a captive audience.
Does it matter for Apple stock? So far, it hasn't been a problem. Apple shares are up nearly 32% this year at a recent $207.64, handily beating the Nasdaq's roughly 20% return. But Apple didn't get where it is today by spending much time being boring. It has arguably been in a transitional phase, and it has been given cover with investors by a huge program of capital returns. That largess will cool in the coming years, however, and the question of where Apple is reinvesting its money will gain heightened prominence among investors. It's not clear Apple management under CEO Tim Cook has a good answer ready.
It looks as if boring may be the new normal. The biggest product debuts this year have been the Apple credit card, which became available last month, and the company's foray into original video programming, Apple TV+, which goes live in the fall. It features new shows such as Steven Spielberg's sci-fi series "Amazing Stories," a drama about a morning talk show and a program about the world's most impressive dwellings.
These are the latest components of chief executive Tim Cook's strategy to move the company to more of a services business. Services now make up a little over 21% of the company's revenue. Analysts project Apple making about $259 billion in revenue in the twelve months ending this month.
Both the Apple Card and TV+ are representative of a narrowing of horizons for the company. When pioneering products such as the iMac and iPhone first appeared, Apple was finding new worlds to conquer by bringing elegant solutions to large problems of everyday computer use.
These new offerings don't solve a fundamental problem in the world, however. They are designed to play upon the company's base of consumers, and expand the dollars that can be rung from that cohort.
It's a strategy Wall Street traditionally loves, the up-selling and cross-selling that milks customer loyalty. For Apple, however, it's uncharted territory. Neither will create much excitement about the brand, and while they may be high-margin revenue streams, they won't "move the needle" for Apple's revenue overall as long as the iPhone business is contracting. The card has the appeal of a high-margin finance business, but nothing as big as the iPhone. The TV push is more dubious, placing Apple squarely in a highly competitive streaming market as a latecomer.
Apple is by no means failing. It still produces fine products. The latest crop of iPads are magnificent devices. But they don't bring the company or the world's computer users into new realms. They merely extend what is an already solid franchise for Apple.
Even the iPhone has been robbed of some of its customary excitement. The price has soared to an awesome level, but the reversal of market share by Apple in the past year shows that the device is alienating some substantial number of new buyers. The buzz has diminished as Apple has streamlined the purchasing process so that new iPhones no longer generate the round-the-block lines they once did. For Wall Street's bean counters, the traditional thrill of forecasting initial iPhone unit sales and then finding out the actual numbers a few months later has been cut short by the company's decision last December to stop reporting unit sales.
Unless the iPhone 11 offers teleportation, it doesn't seem things are going to get scintillating any time soon.
All of this seems as if it's by design on Cook's part -- an orchestrated effort to tame the wild and speculative energy around the company and its stock. He has leveled the hills and raised the valleys. It's a no-drama sort of situation. That makes information arbitrage in the stock much less plentiful, robbing some of the energy in the trade.
Any company, certainly a forty-three-year-old, is entitled to ease into a comfortable existence of turning out good products, paying a dividend and buying back stock. The issue for Apple is that its dulling down has taken place under cover of not just any capital returns program, but the biggest one in history. That staggering munificence has forestalled questions about product for years now.
The end of the gravy train, however, is in sight. As TheStreet explained earlier this year, come 2023, Apple will have reduced its net cash balance from the current $102 billion to zero, as planned. Without a dramatic increase in its annual free cash flow generation, which seems unlikely, the company will have no room to raise its buybacks and dividends, ending a decade of rising capital returns.
At that point, but possibly sooner, investors who have been dazzled by capital returns -- the mercenary type of investors who just want to get paid -- will demand to know what the purpose is of a slow-growth, annuity-type entity with a decidedly muted product cycle and a payout that no longer rises and rises. That's a company in a holding pattern. It's the kind of investment that Warren Buffett loves, and he already owns a lot of Apple. But it's new territory for Apple and its holders.
None of that should imperil Tim Cook's employment. Few chiefs have ever steered such a giant empire with such cool and finesse. Investors shouldn't seek to replace him. But they will surely ask at some point, "Where to now, Tim?"
Tiernan Ray neither trades nor owns shares of any companies mentioned in this article.