Apple posted its worst quarterly financial results in more than a decade on Tuesday. Sales of iPhones, iPads, and Macs all fell by double digits, leading to a 13 percent drop in total revenue. The markets have reacted harshly, with the company's stock losing more than 7 percent of its value in after-hours trading.
Apple is still an enormously profitable company — it pulled in more than $10 billion in net income last quarter. But the latest figures represent the end of an era in which CEO Tim Cook — and before him Steve Jobs — could seemingly do no wrong.
However, the disappointing results don't necessarily mean that Cook has made any major management blunders. The issue is simply that the iPhone has been one of the most successful consumer products in world history. It's an almost impossible act to follow.
The iPhone is a truly massive hit
To get a sense for the magnitude of the iPhone's success, it's helpful to look back at Apple's financial picture nine years ago. In April 2007, a few months before the iPhone first appeared in stores, the company reported that it had sold 1.5 million Macs and 10.5 million iPods between January and March 2007, generating $2.3 billion and $1.7 billion in revenue, respectively. That was considered a big success and an impressive turnaround for a company that was close to bankruptcy when Jobs took over in 1997.
Today, of course, those figures look puny. Between January and March 2016, Apple sold 51 million iPhones, generating $33 billion in revenues — more than 10 times as much revenue as the iPod generated in its heyday. In addition, Apple sold 10 million iPads and 4 million Macs, for another $10 billion in revenue.
The markets are reacting negatively because the 51 million iPhones Apple sold in the first three months of 2016 is smaller than the 61 million iPhones Apple sold during the same quarter a year earlier. But 51 million is still a massive number. For that matter, most companies would consider selling 10 million iPads to be a big hit. Apple's financial results are only disappointing compared to the very high expectations set by previous quarters' results.
Apple is searching for the next big thing
A good way to tell if Wall Street is optimistic or pessimistic about a company is to look at the ratio of its stock price to its earnings. When this number is high, it's a sign that investors are optimistic about the company's growth. Google, for example, has a price/earnings ratio of 30, while Facebook's is 84. As impressive as these companies' profits have been in the past, Wall Street expects them to make even more money in the future.
Apple is in the opposite situation. Its price/earnings ratio is around 10 — on par with stodgy companies like Ford and Verizon. That's a sign that investors aren't optimistic that Apple will be able to come up with another product that's anywhere close to the success of the iPhone.
So far, that skepticism has proven justified. Apple has sold millions of iPads, but iPad sales seem to have peaked in 2013. Apple hasn't provided sales figures for the Apple Watch, but estimates suggest that it's only a modest hit so far.
Presumably, Apple is working on other products that it hopes will be big hits. Maybe the rumored Apple Car will generate iPhone-level revenues and profits. But if Apple fails to find a successor to the iPhone, that won't be a sign that they've done anything wrong. iPhone-level hits are just very, very rare.