Can Apple Remain on Top?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the untimely passing of Steve Jobs, Apple (NASDAQ: AAPL) shareholders and customers have all been trying to discern whether the company can remain a consumer electronics maven under Tim Cook. While the Apple faithful – those who religiously buy every new product the company releases – represent a significant buying contingent, there are others who have begun to question if the premium prices demanded for Apple products are justified. As competitors like Google (NASDAQ: GOOG), Samsung and Nokia (NYSE: NOK) continue to close the gap in terms of product offerings, one must consider whether owning Apple shares has become a fool’s errand.
How Apple Got to the Top
The two characteristics that allowed Apple to reach the pinnacle of every space in which it competes are its ability to innovate and its ability to drive the direction of the market. Without belaboring the obvious, there is no doubt that the iPod, iPhone and iPad have each defined – or redefined – the respective spaces in which those products compete. With Apple’s intuitive iTunes software to streamline the management of every Apple device, consumers have become loyal to the brand with pure devotion.
Perhaps, however, what has really brought Apple to its current position has been the company’s ability to drive market direction. Rather than conducting market research to determine what products consumers want, Apple has taken the position that it knows best, designing products that consumers could never have conceived but loved all the same. To remain on top, therefore, it would seem that rather than making minute tweaks to existing products, the company will need to roll out the next never-before-seen device with true “awe factor.” In the absence of Jobs to drive the ship, Apple’s ability to invent the next hot thing is in serious doubt.
As the buzz about the potentially pending release of the iPhone 5 begins, the clearly must-have upgrade is a transition to the LTE protocol. Company critics have spent the last year wondering how Apple could claim to be a leader while still pushing smartphones that relied on old technology. Why have an iPhone 4 that does not include 4G capability? Where Samsung, Google and Nokia have all been solidly in LTE for the better part of a year, Apple users are growing impatient. Google’s Android marketplace is rapidly catching up in the number of apps available, and most mainstream offerings are available on either platform. Even assuming the iPhone 5 does include LTE capability, for the first time in several generations of smartphones, Apple is the company that is essentially playing catch-up. Short of some seriously innovative features, the iPhone 5 will be more of a current device, instead of an advanced one.
Another serious question for Apple is its lack of focus on the lower-end market. Should wireless providers decide to end the subsidization of devices, it is difficult to believe the same number of users will gladly spend $600 on a phone. If the market contracts, Apple can offer “old” phones to consumers wishing to spend less, but they do not have any products that are specifically targeted at this end of the market.
The latest iPad, the iPad 3 had the company stuck with its traditional naming convention, offered retina display and few other improvements. The Samsung Galaxy Note 10.1 is set to go on sale at both Best Buy and Amazon.com. The device will offer several features not available on an iPad, including a stylus, a split-screen that will allow multiple apps to run simultaneously and multiple cameras. The device will run on Google’s operating system and looks to build on the success of Samsung’s success with the Galaxy smartphone series. Additionally, Google has already begun to advertise the release of its own tablet, the Nexus 7. While Apple has enjoyed a 64 percent market share based on year-to-date sales, these are two new competitors that should make Apple wary.
While Apple has repeatedly proved that writing the company off can result in being left behind, it is clearly at an important crossroads. With a P/E under 15 relative to Google that is trading near 20 on a trailing twelve month basis, the stock does not appear overvalued. Ultimately, however, Apple’s competitors are coming hard and upping the innovation ante considerably. In the near-term, the stock appears solid, but as a long-term option, there are better choices. If Apple does create the next hottest thing, being on the sidelines will cost investors some of the initial pop, but the stock will march higher when that day comes. In the interim, being on top means there is a long way to fall and until Tim Cook is properly proven, the risk-reward ratio is better in other names.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Best Buy, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, Google, and Nokia. 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.