Why Apple Will Continue to Fall

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

Last time, I discussed the bullish case for Apple (NASDAQ: AAPL). But as an investor, I feel it's important to look at the flip side of the coin. Here are the reasons Apple will might be continuing its steep downward descent. 

1. Competition is now intense.

2. Outsized margins must come down

3. Cell phone products are nearing a plateau.

4. Few gaping holes are left in the consumer landscape.

History

There comes a point in any product's life cycle that changes become much more incremental. One could argue that PC's have already reached this point. I feel my PC does everything I could ask, and feel little need to spend money to upgrade to a newer model.

When Apple introduced the iPhone in 2007, it deserved full credit for raising the bar for smartphones by leaps and bounds, and bringing to life the Apple app store and ecosystem. There was nothing like the iPhone before it debuted, and Steve Jobs rightfully embraced the idea of cannibalizing iPod sales with a phone that doubled as a music player. 

Consumers sprinted to Apple Stores, while Google (NASDAQ: GOOG), was caught largely unaware, with its Android OS being nowhere near completion. Microsoft (NASDAQ: MSFT) was, let's just say, "behind the curve," and Blackberry (NASDAQ: BBRY) once king of the smartphone, did not embrace the ecosystem, or the larger screen sizes and the accompanying reduced battery life consumers were willing to exchange for it. Apple had a near-monopoly on the high-end smartphone market, and quickly gained a cult following of consumers who gladly paid higher prices for all things Apple.

The introduction of the iPad only reinforced all this, further enhancing Apple's brand.

Competition

Apple's outsized profits, by the nature of capitalism, attracted tremendous competition. 

Today, Google's Android OS dominates market-share globally, and has rapidly improved and innovated. It is far more open and customizable than iOS, and is given away to equipment manufacturers for the right price: free. Even the biggest Apple fans I know admire the Android-powered Samsung S4's capabilities.

With Microsoft introducing the Windows phone to rave reviews, and Google's own expected future innovation with their Motorola subsidiary, the consumer has infinitely more choices than they did when the iPhone first arrived.

Margins

With the intense competition described, Apple's unheard-of hardware margins must fall. How many people will be willing to pay so much extra to have the Apple logo on their phone when others equal or better the iPhone's capabilities? No longer does the owning the phone have the same cache.

Additionally, if Apple introduces a cheaper version of their phones, does this not take away from the status symbol that carrying around an iPhone currently provides? On the other hand, if Apple doesn't release that cheaper phone, it will positively lose the lower end of the consumer market to Nokia, Samsung, and other Android-based systems. According to CBS News, 56% of American adults own a smartphone; the growth lies in the developing world, most of whom cannot afford the iPhone. For Indians making $2,000 a year, and Chinese making $4,000, paying $600 for a smartphone is a HUGE investment.

In releasing a low end phone, Apple's management is almost in a "damned if you do, damned if you don't" situation.

When the iPhone first arrived, phones had a long, long ways to go in terms of meeting consumers needs. I doubt those of you out there with high end phones today can think of many things you wish your phone could do which it doesn't.

Your phone acts as a GPS navigation system, a streaming music player, a reader, a browser, an alarm clock, stop watch, etc etc. In careful examination of the Samsung S3 to S4 -- the latest evolution on the market -- the changes are much more incremental than they were in the past. The ability of the phone to read where you are looking, for example -- a function always on, draining your battery -- does little to improve the user experience. 

I'm not saying phones won't improve. I'm saying we are reaching a plateau where change will be much slower, with the accompanying decreased consumer demand to upgrade. This affects not only Apple, but all smartphone makers. The challenge is, unlike Google and Microsoft, Apple derives the majority of its profits from the iPhone. 

Gaping Holes?

The iPhone and iPad filled holes for consumers. Of course, the smartphone was already in existence with Blackberry, it's just that Apple did it much, much, much better and developed the App ecosystem enabling developers to increase the iPhone 's capabilities, and thus its appeal.

Bill Gates envisioned the tablet long before Apple brought it to market, but Apple was the first make the tablet a user experience to remember, while everyone else was caught sitting on their hands.

The question is, where are the holes in the market today that one derives outlandish profits from? Wearable technology/computers? Possibly. And yes, there is the TV. The difference between now and 2007, is the likes of Google and Samsung, are not being caught unaware and are creating their own product. The longer that Apple takes to release its own version of the product, the less chance of success it has.

Final Word

Apple appears cheap right now, with a P/E around 10. After you back out an estimated $145 a share in cash, it trades even lower. That said, Apple needs to introduce a revolutionary new product to make up for iPhone profit center that is being chipped away at. Otherwise, Apple will experience quarters of negative growth, sending its stock price down further.


Margie Nemcick-Cruz owns shares of Apple, Microsoft, and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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