Apple Could be the Next Big Tech Miss
Sam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So far, this earnings season has seen big misses from such tech giants as Google (NASDAQ: GOOG), Microsoft, eBay and Intel. When Apple (NASDAQ: AAPL) reports next week, investors should be prepared for the Cupertino tech giant to continue the trend.
Apple, for all intents and purposes, remains a company largely dependent on one product: the iPhone. In just the last few months, there’s been a wave of evidence suggesting that demand for smartphones in general has cooled significantly.
That’s not likely to result in a great quarter for Apple, especially given that its flagship phone is a generation behind its competitors.
Apple’s dependence on the iPhone
Don’t be fooled. When it comes to Apple, there’s really only one product that matters. Sure, the iPad accounts for a large and growing portion of the company’s revenue and profit, but the iPhone is still king of the company.
Last quarter, the iPhone accounted for half of Apple’s revenue. Factoring in iTunes’ sales, which accounted for about 10%, it’s even bigger than that. Even more impressive, the iPhone generates about two-thirds of Apple’s profit.
Of course, that profit figure was based on estimates from last year. Given the ongoing trends in the smartphone market, the ratio could soon change.
The smartphone market is saturated
But that change won’t be good for Apple’s shareholders. While the company’s long-term future may rest with the iPad, that’ll be because the market for iPhones has shrunk.
Based on recent events, it’s clear that the market for smartphones (at least in the US) is largely saturated. At this point, it may be reasonable to assume that everyone who could afford and desire an iPhone, already has one, and while consumers will upgrade to the newer model every few years, the growth in iPhone sales seen over the last few years won’t be repeated.
So far, 2013 has seen the release of four flagship smartphones: Samsung’s (NASDAQOTH: SSNLF) Galaxy S4, HTC’s One, Sony’s Xperia Z and BlackBerry’s Z10.
With the exception of Sony’s offering (which was only recently brought to the US), all the other phones have seen a very tepid reception. Samsung’s Galaxy S4 had a strong launch, but demand rapidly tapered off, and Samsung shares plummeted after the company reported disappointing earnings last month. Like Apple, Samsung remains largely dependent on its Galaxy handsets for a big chunk of its profit.
For HTC, the story was nearly identical -- a strong launch, but not enough to make for a good quarter.
BlackBerry shares were eviscerated when the company announced that it had shipped less than 3 million BB10 devices last quarter, leading some (such as myself) to question BB10’s future as a viable mobile operating system.
But what’s even more notable about these devices is that they are all a generation ahead of Apple’s iPhone 5. Granted, specs aren't going to sway an Apple devotee into switching operating systems, but all the aforementioned phones boast sharper screens, faster processors and better cameras than the iPhone 5.
Consumers aren't upgrading
AT&T and T-Mobile have announced new plans to allow subscribers to upgrade their phones more often. Too bad no one wants to upgrade anymore.
The Wall Street Journal reported on Wednesday that fewer people are upgrading their smartphones. Last year, the US upgrade rate turned negative.
The Wall Street Journal notes that with smartphone penetration at nearly 70% of contract subscribers, there are less people making the switch to smartphones from feature phones.
But even among smartphone users, there’s increasingly less need to upgrade. Samsung’s Galaxy S4 was considered a good phone by most tech critics, but was found to be little different than the company’s prior S3 model.
Can gimmicks rejuvenate the smartphone market?
To try to juice sales, it seems companies are increasingly turning to gimmicks.
In addition to Samsung’s standard S4, the company just released the “S4 Active.” The waterproof phone could appeal to consumers prone to dropping their phones in water. That could give Samsung a sales boost, but it seems like a niche feature that would appeal to only a select group.
And while Motorola’s Moto X is incredibly hyped for its rumored “contextual awareness” features, the actual selling points could come down to two simple gimmicks: its going to be made in the USA, and buyers will able to pick a custom color.
Hopefully for Google shareholders, that will be enough to turn the struggling Motorola division around. To date, Motorola has been a burden for Google, costing it hundreds of millions of dollars. In fact, on Thursday, Google reported that Motorola lost $342 million in the recent quarter.
That’s still a small portion of Google’s overall earnings, but if Motorola could get out of the red, it would certainly help Google’s bottom line.
Investing in Apple
As Motley Fool’s own Adam Levine-Weinberg points out, long-term investors probably shouldn't be swayed by Apple’s upcoming results. If you buy into the larger story, (new products like watches and TVs built around the iOS ecosystem) then one quarter isn't going to make a big difference to your investment thesis.
But for anyone with a short-term outlook, or anyone using leverage, it wouldn't be wise to expect a strong quarter. Apple hasn’t released a major new product since last October, and the iPhone remains far and away its workhorse product. Given the recent trends in the smartphone market, it’s likely that iPhone sales could disappoint, and that could spill over into a larger Apple earnings miss.
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Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. 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!