Apple Warns Investors: Future Products May Not Match iPhone's Profitability Amid AI and VR Push

Apple warns investors future products may never be as profitable as the iPhone

Apple has warned investors that future products may never be as profitable as its iPhone business, as it pushes into unproven new markets such as artificial intelligence and virtual reality headsets. The iPhone maker added the new warning on growth and profit margins to its latest annual report, in the list of "risk factors" facing the tech group's business. "New products, services and technologies may replace or supersede existing offerings and may produce lower revenues and lower profit margins," Apple said, "which can materially adversely impact the company's business, results of operations and financial condition". Apple routinely warns investors in its annual reports that competition, foreign exchange, supply chain issues and other factors can put "volatility and downward pressure" on its margins. The same 10-K regulatory filing in previous years suggested that new product introductions could have "higher cost structures". But until now, Apple has not been so direct in addressing the financial profile of its future products. Elsewhere in the new filing, Apple added new warnings about the potential impact of "geopolitical tensions" -- a phrase that has been absent from its risk factors for several years -- as well as safety risks from new AI features. The disclosures come as Apple is investing heavily in AI to catch up with rivals such as Google and Meta, as well as in its new Vision Pro "spatial computing" headset. Its first "Apple Intelligence" features launched last week, with more -- including the integration of ChatGPT to its Siri assistant -- expected in the coming months. Apple is also facing regulatory pressure on its App Store and other parts of its high-margin services business, while the recent US antitrust victory against Google threatens to cut off billions of dollars in licensing revenues that Apple currently makes from the search group. Warren Buffett revealed on Saturday that his Berkshire Hathaway had cut its stake in Apple by almost two-thirds in just over a year. Apple last week reported a 6 per cent rise in revenue to $94.9bn for the quarter to September 28, with record gross margins of 46.2 per cent. According to consensus forecasts collected by Visible Alpha, most Wall Street analysts predict Apple's gross margins will rise in the coming years, reaching 49 per cent by the end of the decade. But some analysts say Apple's new products are not certain to match the margin profile of the iPhone and its associated services, which range from music and video subscriptions to mobile payments and cloud storage. "We are sitting at a point where there are a lot of unknowns," said Gene Munster at Deepwater Asset Management, as Apple moves into new product categories. Apple's Vision Pro headset, its first new computing device in years, comes with a $3,499 price tag and has experienced limited sales so far. Munster also raised the question of how Apple's services business would make money from generative AI, beyond using the new features to drive device sales. Apple does not currently charge a separate fee for access to its AI features, which run only on its latest iPhones. "AI is transformative, and the first cut at how they approach this isn't going to be their last," Munster said. Apple's gross margin has expanded from 33 per cent in 2007, the year the iPhone launched, holding at about 38 per cent or above for the past decade. Despite intense competition from lower-cost rivals in the smartphone market, where growth has slowed in recent years, Apple's gross margin has grown to more than 40 per cent since 2021 as more customers opt for higher-priced iPhones. The growth of Apple's services business, which is now on pace to make $100bn in revenues a year, has boosted that margin, in part thanks to payments from Google to be the iPhone's default search engine. Apple's services gross margin is above 70 per cent, compared with 36-37 per cent for its hardware products. "It's kind of an interesting time for Apple," said Dan Newman, chief executive of the Futurum Group, noting that while the company is richly valued at around $3.4tn, its growth rate is in the mid-single-digits. Apple had traditionally focused on making hardware improvements to each new generation of iPhone, Newman said. With AI software now the big selling point for its latest phones, the company needed to cover itself, he added. "I think Apple's business model is changing and they are probably putting in some legal protective language that reflects that."

Apple warns investors its new products might never be as profitable as the iPhone

Apple is warning investors that its new and future products might never be as profitable as the iPhone. The disclosure comes as the company is pursuing newer technologies like artificial intelligence and mixed reality headsets. Apple added the warning in its latest annual report under the "business risks" section, as first reported by the Financial Times. "New products, services and technologies may replace or supersede existing offerings and may produce lower revenues and lower profit margins, which can materially adversely impact the company's business, results of operations and financial condition," Apple wrote in the report. The company has been working to implement consumer AI features in its products to compete with rivals like Google and Meta. Apple's initial Apple Intelligence features launched last week, and the company has promised additional features, such as a ChatGPT integration, in the coming months.