Apple: Are These Really the Chinks in the Armor?
Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The big question about the most valuable company in the world is how long will it be able to maintain its numero uno position? Gone are the days when Steve Jobs used to ridicule the very idea of a 7-inch tablet. Instead, Apple (NASDAQ: AAPL) has been forced, yes forced, to release a smaller version of its famed iPad, its biggest acknowledgement to date that the competition is truly catching up. Not to mention the recent problems with Siri and Apple Maps, which have culminated in the departure of Apple's mobile software head, Scott Forstall.
I know die hard Apple fans would be quick to dismiss this as part of a major management reshuffle, a common occurrence in corporate boardrooms. But what’s perhaps more important is that these flaws highlight the fact that Apple does not always manufacture the ‘perfect’ products that it’s often associated with. And this is precisely what may make potential buyers think again about spending $100 to $200 more on an Apple iPhone or an iPad, at a time when competitors like Amazon (NASDAQ: AMZN) are screaming their hearts out saying, “Much More for Much Less.” With its base model 7-inch Kindle Fire HD sporting a better screen resolution than the iPad Mini, as well as being priced a significant $130 less than the latter, Amazon has every right to feel good.
What has really emboldened competitors and left investors a wee bit jittery is the fact that Apple missed analyst expectations, even as it reported profits for the last publicized quarter, mainly on the basis of lower-than-expected iPad sales. While the drop can certainly be attributed to customers holding off on iPad purchases in anticipation of a newer model, the fact remains that the competition did eat into its share of profits.
Interestingly, arch rival Google’s (NASDAQ: GOOG) Nexus 7 is also priced $130 lower than the iPad, adding fuel to the Android onslaught – Apple’s perennial pain point. But an immediate threat seems unlikely, given the known fact that Android has fewer applications targeted towards tablets, an area where Apple wins hands down. But price does matter, as the latest findings of research firm Gartner reveal. While Android-based tablets are slated to increase their share of worldwide tablet sales to 40% this year, up from last year’s 30%, Apple’s share of the market is likely to decline to 58% this year from a high of 66% last year.
A definite reason for this can be attributed to Apple’s slow product design cycle, with the company relying on once-a-year upgrades, vis-à-vis constantly featured new product releases and upgrades by its competitors. That certainly puts pressure on the company to release a groundbreaking product that will remain competitive for a long time to come. And as Michael Obuchowski of North Shore Asset Management LLC correctly puts it, “That’s going to be increasingly difficult.”
To fend off competition in the tablet market, Apple has done all the right things. It has upgraded its existing iPad model, along with introducing a smaller and cheaper version of its tablet. That also translates into higher component and R&D costs, as well as squeezed profit margins. Yes, costs will probably lessen over time due to increased sales, but the question remains as to whether or not this will be part of Apple’s revamped business strategy. That can be a cause of worry to investors.
Apple’s biggest revenue earner, the iPhone, doesn’t seem to be doing very well either. The maps fiasco aside, rival Samsung’s record profits generated for the third quarter is a distinct warning bell for Apple, especially when you consider that its solely on account of demand for the former’s Galaxy line of smartphones. The lead is widening, with Samsung grabbing 35% of market share in its third quarter, against 17% held by Apple in a whopping $219-billion worldwide smartphone market, according to Strategy Analytics. What’s more worrying is the research firm’s revelations that repeat purchase intentions of Apple iPhone owners in the US has actually gone down from 93% last year to 88% in the current year.
So what is the future scenario we are looking at? Is it recurring higher costs based on upgrades, lack of real product innovation, or cheaper competition? Let’s face it – the much-touted iPhone 5 probably has all the features that are already present in a 1 year-old high-end Android smartphone. Maybe it's time for Cupertino to get back to the drawing board?
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subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Google. Motley Fool newsletter services recommend Apple, Amazon.com, 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.If you have questions about this post or the Fool’s blog network, click here for information.