iPhone, therefore I am

STEVE JOBS once visited an apple orchard while on a fruitarian diet, and it gave him the idea for the name of the company that he, Steve Wozniak and Ronald Wayne went on to found. Jobs thought the name would make the company seem quirky, approachable and fun. Its popular, highly profitable products have helped make it the world’s most valuable company for nearly five years. However, questions are growing about its shelf life.

On January 26th Apple announced profits for its most recent quarter of $18.4 billion, more than any listed firm worldwide has yet made in a three-month period. However, the good news was overshadowed by Apple’s warning of a sharp fall in revenues in the current quarter. In the past six months its shares have fallen by over 20%, more than double the decline in the S&P 500 index, on fears that sales of the iPhone, which provides most of the firm’s revenues and profits, have peaked. Is it only a matter of time before Apple (worth around $550 billion) is overtaken by Alphabet, Google’s parent ($500 billion)?

In its rise to greatness, Apple has repeatedly shrugged off bouts of panic among investors, who have suddenly convinced themselves that its glory days are over. The most recent was three years ago, amid fears of rising competition from other smartphone and tablet makers. But each time Apple has bounced back and gone on to greater highs, the job of topping its most recent achievement has become harder.

Beating the 231m iPhones that Apple sold in the fiscal year to the end of September will be a formidable task. The smartphone market is ever more saturated. Worldwide sales of phones costing more than $190 will grow by just 3% this year, reckons Strategy Analytics, compared with 64% in 2011. (The average selling price for the iPhone is $691, although carriers usually help subsidise the cost.)

Meanwhile, the global economy—and China in particular, upon which Apple depends for a growing share of its sales—is looking more fragile. Recently several Asian suppliers have been sharing stark warnings that orders for iPhone parts, such as chips and cameras, are down. Currency fluctuations have made iPhones significantly more expensive in some markets, like Japan and Australia, which could put them out of reach for new buyers.

Sales of iPhones are likely to decline by around 10% this year, according to analysts. But then what? Loyalty among its users is high; perhaps 90% go on to buy another one. According to an analysis by Sanford C. Bernstein, another research outfit, if such users upgrade to a new iPhone every two years, in 2017 Apple will sell them another 185m, not including sales to new users. The installed base of iPhone owners (and thus users of iTunes and Apple’s other revenue-earning services) could easily grow to 534m in 2017, up by 13% from 2015.

The iPhone’s future will depend a great deal on how compelling its next incarnation, expected in September, will be. Cheaper versions can also help boost sales. The lower-priced iPhone 5c, which Apple launched in 2013, enhanced the firm’s appeal in China. Tim Bajarin of Creative Strategies, a research firm, thinks that Apple may offer an even more affordable iPhone for the Indian market. There is currently much excitement in India about Apple’s plans to open shops there. But finding suitable locations, and dealing with the red tape involved in opening them, will not be easy. And only a small fraction of India’s population has the means to buy even a cheap iPhone.

So, Apple is under pressure to produce another hit product. Sales of iPads have wilted, and Apple’s watch, released last year, has not sold as well as optimists had predicted. Its answer to disrupting television, Apple TV, has proved merely a discretional plaything for wealthy consumers who want a slicker interface and do not mind spending more on films and TV episodes à la carte. Apple faces plenty of roadblocks in making a success of its long-rumoured electric car, which it is reportedly hoping to complete by 2020. Recently the head of that project, Steve Zadesky, left.

As an investment, Apple is surprisingly inexpensive. Its shares trade at about 10.4 times forecast earnings, excluding cash, compared with Alphabet and Facebook, which trade at 21.4 and 33 times respectively. That is because many perceive it as a hardware company—vulnerable, like Hollywood studios, to product hits and flops. Apple is trying to change that image and become perceived more as a services company, with stable recurring revenue. Its services division, which includes its app store and music offering, has huge sales, of around $20 billion a year. That business will only increase as the number of users expands and spends more in the Apple ecosystem. So long as it stays fresh in the eyes of consumers, Apple will be able to prove the sceptics wrong—again.