Apple Is Losing Its Shine

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

There are very few certainties when it comes to investing in the stock market. For the past decade, however, nothing seemed more certain than Apple’s (NASDAQ: AAPL) continued excellence in the tech sector. Churning out world-changing innovations like the iPod, iPhone, iPad, and the Macbook, innovation and creativity were as natural to the company as tying one’s shoes. The last year, however, has called this company's long-standing reputation into question. As investors are starting to ask questions, some are also looking elsewhere for opportunities.

Hedge fund managers bearish 

Last week, Bloomberg News polled hedge fund investors from all over the world on the status of Apple. A whopping 71% said that Apple has a problem with innovation. What is worse for Apple is that this loss of confidence in their ability to innovate has resulted in various hedge funds, especially in Europe and Asia, selling Apple stock and looking at other investment opportunities. Amid slowing sales and vigorous competition, Apple’s stock has plunged by 40% from its September 2011 high according to Bloomberg News

Making matters worse, the company has suffered a drop in return on assets (ROA) from 31% at its 2012 annual report to roughly 19% as it stands currently. Apple had reported increasing ROAs from 2010 to 2012, which at the time had alleviated some investors’ concerns about whether or not this was a good company to invest in. Now it seems that the company's current lack of innovation is showing up on the company’s income statements as returns begin to dwindle.

Apple’s loss is Microsoft’s gain

Aside from investor confidence, Apple has to get back to creating new gadgets that people will buy. The company must also stay mindful mindful that its close competitor Microsoft (NASDAQ: MSFT) recently announced its latest video game console to the general public.

Apple’s pain with investors also presented a golden opportunity for Microsoft, allowing the company to sell corporate bonds for a lower interest rate than Apple for the first time in a while. The record $17 billion bond sale for Apple may be a sign that Apple is in the process of increasing their capital, which should fuel speculations that they will be getting off their innovation slide very soon. The interest rate comparisons show that Microsoft is the safer bet, however, thanks largely to a huge surge in Microsoft stock this year, which has also put Bill Gates back on top as the world’s richest man.

In addition, Microsoft’s new game console is set to include a highly-responsive version of its motion software Kinect, as well as the ability to use Skype while on the new device. These two improvements are sure to please console enthusiasts such as myself as well as investors who are looking to see if Microsoft can build on recent successes including the Xbox 360 beating Sony’s PlayStation as the #1 game console. If Microsoft has a good rest of 2013, which looks like it will be at least partially dependent on how well the new console release goes down, this could mean a serious setback for Apple since Apple isn’t a participant in console gaming – or at least not yet.

The smartphone showdown

While the console wars usually don’t involve Apple, one of the enduring strengths of the company was that its iPad and iPhone helped create a platform for numerous small independent game companies to create games at a low cost. This has led some to speculate on a future in which Apple can dance with the “big 3” (Microsoft, Nintendo, and Sony) in video game development. Unfortunately, Apple has to contend with phone makers Nokia and Samsung (NASDAQOTH: SSNLF)  in the realm of portable gaming, companies whose smartphones that use Google’s Android software are eating up market share. This is largely thanks to the phones being cheaper and more accessible than the iconic iPhone, along with boasting a more wide open platform for app developers. This could definitely change if Apple can release a new device or a significant improvement on what they already have. Such a change would give the company a boost in what is quickly becoming a highly competitive section of the market, especially as it appears that merely brandishing the iconic Mac logo won’t be enough anymore.

It hasn't helped Apple's reputation either when they took Samsung to court over possible patent violations regarding the new Galaxy s4. While Apple won the case and was initially awarded $1.05 billion in damages, US District Court judge Lucy Koh decided to wipe nearly $450 million from that total, citing the jury's miscalculations in the settlement. Judge Koh had recently blocked a request by Apple to have Samsung stop selling the phones in the lawsuit, claiming that Apple could not prove that the purloined technology was responsible for customers buying Samsung products over Apple.

The lawsuit though has become sort of a Pyrrhic victory for Apple because even though they may have had a case of patent infringement, it has hurt Apple's image in the eyes of the general public. The aggressive pursuit of damages has made it seem like Apple is resorting to court cases and patent protection rather than developing products, giving the company an image of being a corporate thug and tarnishes the "cool guy" vibe that it spent nearly 40 years cultivating. With the press relations problems coupled with an increasingly competitive market for smartphones, Apple has both an innovation problem in the eyes of investors, and a corporate raider problem in the eyes of customers, which makes Apple's road back to the top even more difficult.

What does Apple do?

Apple has hit a rough stretch since peaking last September, and is currently looking a bit lost in the shuffle of smartphones. It used to be that Microsoft was Apple’s only real competitor in the computer market, but with the expansion of the smartphone market the company is seeing new battles. A loss in confidence from investors underscores the problems of the company, as many are losing their love affair with the iPhone compared to more advanced products like the new Samsung Galaxy s4. This is nothing new for Apple, however, as the company had a similar down period in between the two Steve Jobs eras. This time, though, Mr. Jobs isn’t coming back and CEO Tim Cook has yet to step up to the plate and give investors and consumers the same level of confidence they had when Mr. Jobs was at the helm. This is an industry that demands innovation and creativity, which Apple has been able to thrive on for years. It’s time to tap that again, and get Apple back on top.

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, “Apple Will Destroy Its Greatest Product.” Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.


John McKenna has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure