Do You Need to be Worried about Apple?
Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The iPhone maker Apple (NASDAQ: AAPL) has been in a lot of talks lately thanks to its recent earnings release, the launch of its latest Mac OS Mountain Lion, its lawsuits with Samsung and definitely the iPhone 5. My recent blog on Apple talked about how the latest quarter was not one of the best quarters Apple experienced, but was not that bad also. The company managed to do just fine. However, the dynamics of the quarter forced me to think about some fundamental points about the company. Let’s look what they are.
The biased Apple portfolio
If you maintain a portfolio of stocks, how many stocks will you like to add in it? Five, ten, twenty or maybe more. But, what if you have just one stock? A portfolio with just a single stock – what can be its drawback? Well, the answer is risk sharing. All stocks are prone to some risks and the more stocks your portfolio will have, the more shared will be the risk. There are two types of risk - unique risk and market risk. Unique risk is the risk which is unique to the stock while market risk is common to all stocks. Though we cannot minimize the market risk, unless we are involved in cross-border investments, we can very well share and minimize unique risks because it's not going to happen that all stocks will be pulled down by their unique risks at the same time. If one stock performs poor, there will be other stocks to dilute the effect of that bad stock.
The point I want to harp on is, too much dependency on any one stock may prove to be harmful since there is no way to dilute the impact of the risk. Now, pick up the essence of the example and put it in the context of a company. If a company is heavily dependent on one product for its revenue, then there is a point of concern. This is exactly the case with our favorite Apple. The company has several products such as the iPod, iPad, iPhone, and Mac computers. But, Apple is heavily dependent on the iPhone which alone accounts for 47% of the top line. iPads are also doing well and Apple is the market leader in the segment with a 68% share. But, iPads account for only 26% of the revenue. Apple’s portfolio may not have just one product, but the weight allotted to one product (iPhone) is surely very high.
How serious are the points of concern?
Apple reported a sequential drop of 26% in the iPhone shipments in its recently ended quarter and this took a toll on the smartphone maker’s top line. Wall Street was not very considerate about this and as an immediate reaction the stock price plunged 5.3%. The point of concern is not why the numbers moved down. The reason for the plunge in shipments is simple and clear. The customers are waiting to get their hands on the iPhone 5, the latest from Apple, rumored to be launched in October and that’s why customers aren’t buying the current iPhone 4S. As a result of this, iPhone sales have dropped and this is a very usual trend which has been observed every time before the launch of the next iPhone. Rather, my concern is, is it right to be so dependent on the iPhone?
Just how important the iPhone is to Apple is clearly understood from the manner in which the company is managing the lawsuits against Samsung. Apple fears it will face substantial irreparable losses if the South Korean phone maker is not stopped from selling the disputed devices. Apple enjoys a profit margin above 50% on its iPhones and in no situation is the company willing to put it at risk.
At present Google (NASDAQ: GOOG) Android is the dominating smartphone OS in the market with a 61% market share and iOS has a 20.5% share only. In the first quarter of 2012, Samsung was at the peak of the smartphone market with a 29% share while Apple was at the second position with a 24% share. So, it’s clear that Apple is neither dominating the smartphone space nor the smartphone OS space. On top of all this, Microsoft (NASDAQ: MSFT) is set to pose a threat to both Google and Apple (but more for Apple) with its Windows Phone 8 OS. According to International Data Corp., Microsoft is likely to move up the market share ladder and become at par with Apple with a 19% share by 2016, while Google will go on maintaining its dominance with a 58% share. So, it seems like Apple is going to lose some market share.
Consumer electronics is a very fast moving and constantly changing market-place. Every day one company or the other is rolling out new technology. In such a situation, no one knows what each company will bring out tomorrow that will pose an additional threat to Apple. Already Samsung’s Galaxy SIII is eating up a lot of Apple’s market. Many consumers who don’t want to wait for the iPhone 5 are resorting to buying the SIII. Previously Apple faced significant competition from the Galaxy SII, which was also being referred to as “the iPhone killer.”
So, if you sum up all these points, don’t you think too much dependency on the iPhone can prove to be fatal for Apple? The iPhone is Apple’s flagship product and has earned huge revenues for the company. But now, for whatever reason, if the iPhone fails to generate revenues, Apple will be in big, big trouble.
Now that it's established why the high dependence on the iPhone is a point of concern, let me also tell you, at this very moment that investors don't need to worry about Apple. Yes, a fall in the iPhone demand can hurt the company badly, but such a time has not come yet. With the demand for iPhone 5 skyrocketing, the chances are that the shipment volume will again surge once the latest model is launched.
What else is going on?
Apple is up to several things which will surely help the company stay healthy. Apple had recently launched Mountain Lion, its latest up-gradation to the Mac based operating system Lion, and it seems the latest platform became an instant hit as sales volume touched the 3 million mark in just 4 days, making it the most successful OS launch ever faced by Apple.
The company is also looking to strengthen its offerings in areas such as mobile and network security and for this it recently announced its plans to acquire AuthenTec (NASDAQ: AUTH), a US based mobile and network security solution provider, for $356 million. With this acquisition, Apple will be in a much stronger position related to mobile payments, making the iOS platform much more secure and dependable. Another reason which makes this deal important to Apple is, AuthenTec is a supplier of mobile security software license to companies such as HP, Dell and Apple’s biggest rival Samsung to name a few. With AuthenTec under its belt, Apple will be in a better position to compete with its rivals, maybe even compel them to start looking for other vendors to provide the security license. The company is also looking out to buy some of the patents from Eastman Kodak in the Bankruptcy Court approved auction as these patents will help the iPhone maker improve its imaging capabilities.
So, as it seems, a lot is going on at Apple. The company is making good progress at all levels. But, the fact that it is largely dependent on iPhone is generating slight concerns among investors though the dependence might not have a negative influence on the company right away. With Steve Jobs standing beside Apple, the company had done many amazing things and it’s again time when it needs to bring out something totally new and again take everyone by surprise. The first mover’s advantage which Apple has been enjoying cannot last forever. There will be a time when competition will catch up with Apple and this calls for another innovation. May be a new iDevice will take some pressure off from the iPhone, assist iPad and give a new direction to this $557.78 billion company. So, right now do you need to be worried about Apple? No, but maybe in the long run.
analyse360degree has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.