The Times are Changing for This Technology Company

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple (NASDAQ: AAPL) is having a hard time lately as the shares have dropped nearly 10% following its Q4 earnings report. While the company has posted solid top line growth, its EPS of $8.67 remained a fraction below the street estimates. What is happening?

The Times They Are A-Changin'

This Bob Dylan song aptly illustrates all that is wrong with Apple. No company can remain at the top for so long and Apple seems to have reached the end of its golden era. That is not to say that Apple will cease to exist, it is just to suggest that Apple will not be such a powerhouse as it had been in the past. Now the possibility is that it will trade range bound. What makes me say so? I just look at the signs:

1) Whatever products Apple has launched after the death of Steve Jobs have not been able to "please" the end user.

2) Users can get better functionality than iPhone at much lower prices. I feel that the time when iPhone gained popularity, it was by far better than all the alternatives available on the market. But at present the things have changed and the competitors are closing in.

3) Consumers have started questioning the point of refreshing the product line every other year.

4) Apple has lost on the trust aspect it has taken long to build with its customers. The map fiasco was a "disaster.” I cannot believe that it could have happened if Steve Jobs was still running the company.

While Apple and Microsoft (NASDAQ: MSFT) are inherently different from each other both of them have been the tech gems of their respective times. Microsoft looked pretty solid in 2002 with its high revenues and growth opportunities. Everyone loved it. Windows was on every computer, the TAM was growing, and FCF was not bad. But the company had far overgrown the growth stage. Now looking at Microsoft while the company has almost tripled its revenues over a period of ten years its stock price has only doubled in comparison taking into account the adjustments for splits. In the same 10 years Microsoft has launched several versions of its highly successful products- Windows and Office, same thing that Apple is doing right now-launching versions of its highly successful products. I feel that Apple could be walking along the same path as the hype around its products decreases.

Cannibalization & Competitive Concerns

With the iPad mini, iPad2 at a lower price and iPad4 all contesting to be the consumer's choice, I believe that a lot of cannibalization is going to happen for Apple going forward. Further, Apple is continuously struggling with its margins as the competition is getting more and more intense. The new products that are being launched by Apple are supporting lower operating margins than usual as is evident from the decrease in gross margins from 47.4% to 42.8% from Q2 to Q3, and a further 277 bps gross margin downfall is expected in Q4.

While many investors will still argue about the low PE of Apple when compared to Amazon (NASDAQ: AMZN), I feel that Amazon’s PE is justified as Amazon is in the process of expansion by building its warehousing empire (in order to offer same day delivery) and Next gen cloud computing assets. Adding to that, I believe that Amazon is the leading retail stock to look for this holiday season as Amazon could break sales record this year too as online holiday sales will grow by ~12% to $96 billion in 2012 as forecasted by shop.org.

The Bottom Line

While I will still be using my Apple iPhone, I will not be willing to invest in the stock anytime soon. Reason? I can get much better returns if I look elsewhere. Even If Apple goes north from now, I don't believe that it can go past the high it had achieved and looking from the current prices I believe that it would be 28% return and who knows how much time it will take. As I believe that the growth stage is finally over for this stock and the stock is going to trade range bound from now on, I would advise the investors to lay off this stock in case you have it.


gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, 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.

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