Apple warns investors that future products will never be as profitable as the iPhone

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Apple has warned investors that future products may never be as profitable as its iPhone business as it expands into untested new markets such as artificial intelligence and virtual reality headsets.

The iPhone maker added a new warning about growth and profit margins in its latest report. annual reportin the list of “risk factors” facing the technology group’s business.

“New products, services and technologies may replace or displace existing offerings and could result in lower revenues and earnings,” Apple said, “which could have a material adverse effect on the Company’s business, results of operations and financial condition.”

Apple regularly warns investors in its annual reports that competition, foreign exchange rates, supply chain issues and other factors could cause “volatility and downward pressure” on its earnings.

The same regulatory 10-K filing in previous years stated that new product introductions may have a “higher cost structure.” But until now, Apple has not been so straightforward about the financial profile of its future products.

Elsewhere in the new document, Apple added new warnings about the potential impact of “geopolitical tensions” (a phrase that has been missing from risk factors for several years), as well as security risks from new AI functions.

The disclosure comes as Apple invests heavily into AI to catch up with rivals like Google and Meta, and in its new “spatial computing” headset, the Vision Pro.

Its first “Apple Intelligence” features launched last week, with more features expected in the coming months, including ChatGPT integration with the Siri assistant.

Apple also faces regulatory pressure on its App Store and other parts of its highly profitable services business, while a recent US antitrust victory over Google threatens to end billions of dollars in the licensing revenue that Apple currently receives from the search group.

Warren Buffett disclosed On Saturday, his Berkshire Hathaway cut its stake in Apple by nearly two-thirds in just one year.

Apple last week reported revenue rose 6 percent to $94.9 billion in the quarter to Sept. 28, with a record gross margin of 46.2 percent.

A line graph of gross profit (%) showing that Apple's profits have risen sharply since the debut of the iPhone.

Most Wall Street analysts predict Apple’s gross margins will rise in the coming years, reaching 49 percent by the end of the decade, according to consensus forecasts compiled by Visible Alpha.

But some analysts say Apple’s new products won’t necessarily match the profitability profile of the iPhone and its related services, which range from music and video subscriptions to mobile payments and cloud storage.

“We’re in a situation where there are a lot of unknowns,” said Gene Munster of Deepwater Asset Management as Apple moves into new product categories.

Apple’s Vision Pro headset, its first new computing device in years, retails for $3,499 and is still on limited sales.

Munster also raised questions about how Apple’s services business will make money from generative artificial intelligence, beyond using new features to boost device sales. Apple currently does not charge separately for access to its artificial intelligence features, which only work on the latest iPhone models.

“AI is changing the approach, and the first look at how they approach this won’t be the last,” Munster said.

Apple’s gross margins have risen from 33 percent in 2007, the year the iPhone was released, and have remained at or above 38 percent for the past decade.

Despite intense competition from cheaper rivals in a smartphone market whose growth has slowed in recent years, Apple’s gross profit has grown more than 40 percent since 2021 as more customers opt for higher-priced iPhones.

The growth of Apple’s services business, which now has revenue approaching $100 billion a year, has boosted those profits, thanks in part to payments from Google to make it the default search engine for iPhones. Apple’s gross margins in its services business exceed 70 percent, compared with 36 to 37 percent for its hardware products.

“It’s a pretty exciting time for Apple,” said Dan Newman, chief executive of Futurum Group, noting that while the company is valued at about $3.4 trillion, its growth rate is in the single digits.

According to Newman, Apple has traditionally focused on improving the hardware of each new generation of iPhone. With artificial intelligence software now the main selling point of its latest phones, the company needs to protect itself, he added.

“I think Apple’s business model is changing, and they’re probably introducing some kind of legal protection language that reflects that.”

Apple declined to comment.