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Why iPhone X Will Not be Enough to Fuel Apple Rally

By ValleyBeat FOXBusiness

The Apple iPhone7 and AirPods are displayed during an Apple media event in San Francisco, California, U.S. September 7, 2016. Reuters/Beck Diefenbach (Copyright Reuters 2016)

Apple (AAPL) stock hit successive all-time highs this week, topping the $700 billion market cap mark for the first time since 2015. Shares of the world’s most valuable company have rallied 40% over the past year on speculation that a feature-rich 10th anniversary iPhone will spark a mega-upgrade cycle.

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That raises some interesting questions: Is the rally sustainable? Will the tech giant meet investors’ expectations? And whatever happened to “the best product pipeline in 25 years” that we heard so much about back in 2014? Last time I checked, we were still waiting for the next big thing.

Was it Apple Watch? Apple Pay? Apple TV? Apple Music? Maybe I’ve been spending too much time binge watching on Netflix (NFLX). Did I miss something?

Let’s face it, none of those products are game changers like the iMac, MacBook Air, iPod, iPhone and iPad were. Which brings us to my final question for Apple: Is that really all you’ve got? Because I’m feeling a little let down.

There’ve been no shortage of product teases that never came to fruition. An integrated television was supposed to revolutionize the living room. A streaming TV service was supposed to get us to cut the cord. Now we hear that the Applemobile is on hold. And Siri still can’t hold a conversation.

Meanwhile, the company’s R&D budget has exploded. What gives?

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Here’s what I think is going on and what’s next at Apple. 

First and foremost, Apple is an iPhone company. Its flagship product accounts for the majority of revenues and profits, and will come maddeningly close to hitting $1 trillion in sales on its 10th birthday. The company is far from a one-trick pony, but even if it were, you’ve got to admit, it’s got one hell of a trick.

For 2017, there’ve been reports of flexible OLED displays, wireless charging and infrared 3D sensors for augmented reality apps like Pokémon and Snapchat. We can speculate on which models will get which features and what they’ll be called, but Apple looks to be pulling out all the stops to ensure that the iPhone’s diamond anniversary is special.

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And yet, global smartphone growth is slowing and, more concerning, analysts worry that the form-factor will someday disappear. I doubt that will happen, at least not for the foreseeable future.

If you think about it, everyone watches TV, listens to music, talks on the phone, browses the Web, texts and emails. Smartphones do all those things. In a gadget-crazed world, if you could only have one, that would be it. That is, as long as the operating system and hardware keep up. Ten years in, so far, so good, but smartphones have a long way to go.

As for Apple, margins may decline over time, but its ecosystem of services – Apple Store, Pay and Music – are growing nicely, while at the same time making it harder to switch. That’s why Apple is now making original video content like “Planet of the Apps.” Services provide nearly frictionless revenue and profit growth. Services are a big deal. 

That said, Nokia once ruled the cellphone market. BlackBerry (BBRY) used to dominate smartphones. Every company is subject to disruptive innovation and Apple is no exception. The biggest competitive risks the Silicon Valley giant faces are from augmented reality (AR) and machine learning.

CEO Tim Cook seems to be well aware of that. In a recent interview he called AR “a big idea like the smartphone” and said that machine learning applications are an exponential driver for advancing the company’s chip technology. He’s right on both accounts, in my opinion.

The one thing that has kept computers from playing a bigger role in our lives is that they live in a machine world of bits and bytes, while we live in a human world of sights and sounds. Our primary interface – two-dimensional screens and keyboards – has kept us from working together seamlessly. That’s rapidly changing.

Computers are learning to write their own code, enabling big leaps in speech and visual recognition applications that companies like Amazon (AMAZN), Alphabet (GOOGL) subsidiary Google and Tesla (TSLA) are exploiting for smart assistants and self-driving cars. And startups like Magic Leap and Snapchat parent Snap Inc., which is planning a March IPO, are working to advance AR through smart glasses.

Machine learning and AR are key to Apple’s future. Siri has to learn to become smarter and more conversational, and Apple’s devices must become AR-capable for a visual first world: first iPhone, then a smart glasses product. That’s the next big thing. If that’s not in Apple’s product pipeline, I say it’s in big trouble. 

What do you think?

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