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Apple: Are Its Glory Days Finally Over?

Maxwell 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) recently released its first quarter earnings statement for 2013. What I find most particular is the fact that no one is talking about two critical factors that have glaring implications for Apple. Apple has posted the slowest growth figures in fourteen quarters and its year-over-year earnings, for the same quarter (December), are flat. I believe that we are seeing the beginning-of-the-end for Apple in what I predict will be a protracted sell off of Apple stock. In this article, I will be discussing why.

While Apple has been an investment darling for years, earning per basic and diluted shares actually decreased. Traditionally, Apple has consistently posted increased earnings per basic and diluted share every quarter. Yet now, for the first time since the end of 2009, earnings have fallen. While these decreased earnings were not excessive it still is disconcerting. Let’s look at what I believe to be the reasons why.

Asia Is Not All It's Cracked Up To Be

While some would argue that Apple will continue to be supported by the changing demographic trends overseas, I would disagree. While I will agree that there is a rapid growth of an emerging middle class that are rabid for all things technology, these same consumers are much more tech savvy and, worse for Apple, demanding. I don't care how much media "hype" you can develop or how rabid your customer base, no business can escape the inevitable; increased competition, higher costs, and an ever growing fickle consumer. Apple faces all three and their most recent earnings show exactly how it is faring in this fight. Look at the following map of world mobile phone usage.

You will note that there is heavy market penetration in Asia and so of course, this is the go to answer from Apple investors when asked about whether Apple can maintain its momentum. Nevertheless, here in lies the rub, hundreds of millions of aspiring Apple customers just cannot afford Apple’s price point. At about 800 U.S. Dollars, even Apple's older model phone, the iPhone 4, still costs more than twice the monthly salary of most of the emerging middle class. Not many have that kind of disposable income.

Factor in the rising competition from Asian behemoth Samsung and the picture becomes even bleaker for Apple. While Apple's share of the smartphone market has nearly doubled in China, Samsung's has nearly quadrupled. For an even more dismal picture factor in the fact that in China, existing network technology is simply not sufficient to fully support the iPhone or even the iPad’s capabilities.

China's largest service provider, China Mobil (CHL), boasting more than 600 million subscribers, readily admitted that they will not have the technology in place until sometime in late 2013. Quite frankly, that might just be the proverbial "too little too late" when you consider that there are other competitors aggressively targeting China. Case in point, China's Huwaei Technologies are producing smartphone's for nearly half the price of the iPhone.

Google Versus Apple

Almost everyone concedes that two of the most dominant smartphone operating systems in the market today are Apples iOS and Google's (GOOG) Android OS; however, die hard Apple fans do not want to concede that the Apple iOS is continuing to lose ground to Android. But here is the reality:

  • U.S. Based Chitika Analytics; "Figures show that in December, Android's share of mobile browsing in North America increased 5.5% to 51.6% while iOS dropped 5.2% to 46.5%"
  • Freelancer.com; "Data shows a faster growth in Android-related jobs of 33% in the fourth quarter of 2011 to 2,454, compared with 18% growth in iPhone-related jobs to 3,682."
  • NPD Group; "Google's Android OS surpassed Apple in U.S. smartphone market share during the first quarter of 2010. Google now enjoys 28 percent of the smartphone market, earning the company the second-place spot behind Research in Motion (36 percent) and pushing Apple to third place (21 percent)."
  • Research Firm Telsyte; "Research found 44 per cent of the more than 10 million smartphone's in use in Australia were now running Android, just creeping ahead of iOS's 43 per cent."
  • Succinctly stated; in 2010 the Android operating system held just about six percent of the smartphone market compared to Apples 39 per cent. Today, that number is at over 40 percent. That is a huge market share loss by anyone's standard and there is no relief in sight for Apple.

Foad Fadaghi of the Telsyte Analyst firm best summarizes the argument; "Lower prices, faster product cycles and carrier support has helped Android become the leading platform."

Microsoft Versus Apple

Microsoft (NASDAQ: MSFT) is still a company to be contended with. I will be the first to admit that I believe Microsoft has given up on the North American market, but to their credit, they are gaining ground in Europe.

  • Kantar Worldpanel ComTech: "According to the latest smartphone sales data, Windows Phone is experiencing 'strong European growth' in particular in Britain and Italy with market shares hitting 5.9 percent and 13.9 percent respectively - up from just 2.2 percent and 2.8 percent at this time last year."

Bottom line, even Microsoft is gaining traction in key markets further eroding Apple's earnings.

Amazon Versus Apple

Amazon (NASDAQ: AMZN) is an industry behemoth that revolutionizes every industry it gets involved in and make no mistake, Amazon will enter the smartphone market. When you consider that Amazon is willing to take a loss on its products like the Amazon Kindle, just to bring a product to market you have to ask yourself what they will do when they enter the smartphone arena.

  • Cens.com reports: "Market observers pointed out that Amazon has emerged as one of the most competitive players in the global market for mobile Internet devices, mostly thanks to its low pricing strategy. Backed by its huge loyal consumer base and successful marketing strategies, the U.S. brand is believed to quickly gain its ground in the segment for smartphone's in the short term."

Bottom line, Amazon will become a major player in the smartphone market and that will have a significant impact on Apple's market share.

The Bottom Line

Without some real innovation over at Apple, I believe that their core revenue generators, the iPhone and the iPad, will continue to lose ground based simply on increased competition and rising costs. As such, I believe that there will be direct pressure on gross margins and revenues for the remainder of this year, especially when you consider that Apple themselves declined to provide a profit forecast. I look to play those quarterly releases accordingly.

 


StockCroc1 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, 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!

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