At the height of its fame, Apple could face the Goldman dilemma of staying on top 

Apple has had an extraordinary quarter – consolidating its esteem as the best-performing tech stock for investors right now. Its rating has been buoyed by the almost universal acceptance of the iPhone and its link to the just-released Apple Watch. But with the prospects for innovative and robust developments creating some shadows at the edges of success, the company would do well to consider several challenges lying just ahead. – Peter Wilhelm

Katie Benner

(Bloomberg) — Apple’s revenue and growth trounce those of other hardware-makers like Dell and Hewlett- Packard. It’s wildly profitable, and growing at a breakneck pace.

The new Apple Watch is shown in a product teardown showing the sensor action and lens, in this handout provided by IFixit in San Luis Obispo, California  April 24, 2015. The Apple Watch launched globally Friday from a handful of upscale boutiques and department stores which Apple courted to help position the watch as a fashion item.    REUTERS/IFixit/Handout via Reuters ATTENTION EDITORS - THIS PICTURE WAS PROVIDED BY A THIRD PARTY. REUTERS IS UNABLE TO INDEPENDENTLY VERIFY THE AUTHENTICITY, CONTENT, LOCATION OR DATE OF THIS IMAGE. FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS. THIS PICTURE IS DISTRIBUTED EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS. NO SALES. NO ARCHIVES.
The new Apple Watch is shown in a product teardown showing the sensor action and lens. The Apple Watch launched globally Friday from a handful of upscale boutiques and department stores which Apple courted to help position the watch as a fashion item. REUTERS/IFixit

Three months ago, the planet’s most admired gadget maker reported the most profitable quarter ever achieved by a publicly-traded company. Its market cap has soared past $700 billion, making it the most highly valued company in the world. Not bad for a nearly 40-year-old tech company that started out selling home PC kits.

Consider, though. In 2008 Goldman Sachs stood at the pinnacle of the financial services industry, an important driver of U.S. and global economic growth. Goldman had posted record revenue of $46 billion in 2007, earning $11.4 billion along the way.

An epic financial crisis soon ensued, of course, and Goldman’s revenue, stock price and reputation all slumped. Goldman remains a vibrant Wall Street player, but has yet to fully revisit the heights it occupied several years ago. The real question is, Why?

When companies achieve the dominance Goldman once enjoyed, they can seem invincible. In truth, they are then vulnerable since not only do they have to perform well — but also at a level that’s almost impossible to sustain for long periods.

In a Fortune feature from 2008, ominously titled “The Man Who Must Keep Goldman Growing,” the firm’s chief executive, Lloyd Blankfein, was hyper-aware of the obstacles. He fretted over the odds of a business like his hitting the shoals — and (presciently) 100 percent if a crisis really hit. As Fortune put it, Blankfein at the time didn’t want to be “the Goldman chief who falls off the tightrope.”

Apple CEO Tim Cook doesn’t seem a Blankfein-type worrier. In fact, he came across as cool and confident during the company’s earnings call this week. But the question remains of how he’ll continue to fuel growth at his juggernaut. In size, earnings and position it’s light-years beyond anything Goldman ever achieved. And this week Apple said quarterly net income had soared 33 percent to $13.6 billion – far more than Goldman earned in any years except 2007 and 2009.

Revenue in the quarter rose 27 percent to $58 billion; the company upped its capital-return programme and increased its dividend by 11 percent. If iPhone 6 and iPhone 6-Plus demand continues apace, Apple could report its highest annual profit since 2012.

Customer Tomoyoshi Fujimura sets up his Apple Watch, which is to be paired with his iPhone, after buying it at an electronics store in Tokyo April 24, 2015. The Apple Watch goes on sale around the world on Friday, the final stage of a protracted launch of Apple Inc Chief Executive Tim Cook's first new product, capping months of publicity and a frenetic two weeks of pre-orders. REUTERS/Toru Hanai
Customer Tomoyoshi Fujimura sets up his Apple Watch, which is to be paired with his iPhone, after buying it at an electronics store in Tokyo April 24, 2015.  REUTERS/Toru Hanai

Angelo Zino, an equity analyst at S&P Capital IQ, thinks Apple has done remarkably well — but  still has a “hold” rating on the stock. His belief is that as companies climb higher it gets harder for them to continue to beat, or even meet, expectations. At some point Apple’s topline growth will decelerate, and become harder to do better than the year before, especially as it racks up record quarter after record quarter.

These are pivotal areas to watch as Apple figures out how to manage the risks that come with being top of the heap.

  • China could emerge as the company’s most important relationship: last quarter’s iPhonesales in China were greater than in the U.S. for the first time, and IDC analyst Crawford Del Prete said in an appearance on Bloomberg West that it will be hard to envision a time when China isn’t the company’s biggest customer.

All well and good. But this could also make Apple vulnerable to vicissitudes in China’s economy and to a government that wants security concessions from tech companies that do business within its borders. While Apple is known for being a staunch advocate of consumer privacy, it also has a massive supply chain operation that relies on Chinese labour.

  • White-hot iPhone sales have eclipsed the question of Apple’s product diversity — but the question is not moot. It also looks unlikely that the iPad will ever be a big product for Apple. The device currently accounts for about 9 percent of revenue, and the company reported in the quarter that iPad sales are falling.
  • Apple Watch’s fortunes are still tied to iPhone proliferation. An Apple car is still a dream, and it’s still unclear if Apple can do something compelling in television although Cook mentioned his company’s work with HBO and said he wants Apple to take part in the “major, major changes in media” that are under way. Apple is also working on music streaming.
  • Could Apple build a robust software business on top of what it has already engineered?  Software has always been seen as a way to keep consumers in the Apple product ecosystem, and not much more. But now the company has Apple Pay, Health Kit and Beats for music streaming. These could be robust platforms in lucrative businesses such as payments, health care and entertainment.

Apple sits atop an enviable stockpile of cash and has been shrewd about how it manages its finances. It has been borrowing billions of dollars — at rock-bottom rates — to buy back stock and issue dividends, a strategy it will continue. From August 2012 through March 2015, the company returned more than $112 billion to shareholders, including $80 billion in buybacks.

Zino sees ongoing annual dividend increases at Apple of between 8 percent and 10 percent, as well as $140 billion in share repurchases, through 2017. What happens after that? If the pace of buybacks and dividends changes, will activist investors emerge? It’s tough at the top.

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