Victor Basta, managing director at Magister Advisors, said: “Apple is currently rated at a PE of less than 10. In order to be re-rated it needs to be able to demonstrate significant earnings growth potential. The amount of profit that can be made out of smartphones will plateau and then contract. Apple needs to get to a place where its most interesting announcements are not about new devices. It must grow its revenues from software and services.
“Device saturation will have a huge effect on RIM, Nokia, Samsung and other device manufacturers. By chasing volumes, they will inevitably go the way of Dell which has itself been frantically replacing declining revenue by driving greater volumes.
“Apple is in the best place to achieve growth and rerating through innovation in software and services. It has hundreds of millions of credit card enabled subscribers through iTunes and the App Store. Apple arguably owns and controls the whole app concept and is the micropayments king.
“How Apple transitions its revenue dependence from hardware to software is at least as important as any Apple TV and in the medium to long term much more so. Fundamentally Apple needs to get to a place where it doesn’t matter whether they sell 50 million devices or five. Devices are fast becoming irrelevant and will continue to trend towards zero profit and beyond.”
Margin pressures have been a theme in this week’s announcements, underpinning the significant pressures facing hardware-focused businesses as the smartphone and device market moves towards saturation. Samsung, which reported huge profits on the back of device sales, is likely to be on the crest of a wave.
Hardware is now simply a tool for enabling consumers to buy content and will become as prosaic an element of the commercial relationship as a credit card: “Apple’s revenues from sales of content are growing faster than total revenues. I expect this trend to accelerate”, said Basta.
Thinning and in some cases non-existent profits on devices add weight to the argument that profit will increasingly stem from incremental content purchases. Amazon already makes no profit on the Kindle mobile device. As competition intensifies across the mobile industry we predict that devices will be sold at a loss or potentially given away to capture value in content sales.