How to Tell if the Apple is Rotting
Kevin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems that with stock “giants” like Apple (NASDAQ: AAPL) there is never a shortage of opinions. This is especially true with tech stocks. Maybe it’s some form of social fallout from the burst tech bubble of yore.
I am one of those people that did well by Apple and thus feel a bit guilty turning on the millionaire production machine that is Apple. While there’s no why Apple can’t continue its long-term success, I believe the rapid rise in recent years is not sustainable. Many of us have been watching to see how Apple would handle the loss of Steve Jobs and how well the ship would sail. The worst hasn’t happened, but signs of trouble are just starting to appear. There are definitive warnings to lookout for.
Is it reasonable to expect great innovations or leadership without Jobs? Many are wondering how many potentially definitive products, like Apple-tv, were left in the pipeline by Jobs. Bear in mind that the last time Jobs left Apple nearly collapsed. This probably won’t happen since Apple has $100 billion in cash. But a long slow descent without its iconoclastic leader who changed the game in multiple industries (music, software, mobile phones, personal computers, publishing, tablets and computer-based animation) is very possible. To those wanting to see an increase in stock valuation or solid dividends, stagnation or decline is a potential problem.
Certainly Apple investors are watching the Samsung as well as Google (NASDAQ: GOOG) lawsuits. To the investor, lawsuits typically mean “hold your breath and wait.” Unfortunately, it may be a year or more before these patent suits are decided. There’s plenty of news and opinions flying around on this topic so suffice it to say that Apple is entangled in legal battles that may spell trouble. I have no legal training and therefore no predictions other than to say a tech giant could get hurt on this one. Those who like to time investments may be buying or selling one or all of the three combatants on this one.
Apple makes gadgets that have taken greater market share than their tower systems and laptops ever did. But everything Apple makes tends to be the costliest in its class. While this made Apple a niche player in the personal computer market, the high-end pricing has been eased in the gadget market allowing Apple to succeed spectacularly. Will there be price wars at some point? That would be a game Apple is not familiar with, although the iPad and iPod have stayed competitive price-wise and the iPhone is competitive, but in a narrow spot at the top price class for smartphones. Continued success requires continued price competitiveness and a lack of price hardballers.
The iPhone is the single most important product accounting for nearly half of Apple’s revenue. The product is at the center of two legal battles and its success is becoming hard to gauge. While the Blackberry is dying out, Samsung and other cellphone producers are ramping up. It’s hard to read the current situation for various reasons. The press spins articles with some sources heralding the ascent of the iPhone while others say its luster is fading. Interestingly, all of the sources use the exact same sales data to achieve diametrically opposed opinions. Good luck analyzing that. Apple’s iPhone is not a diverse product line like the Samsung phone product line. Will this hurt Apple in the long run? The iPhone hasn’t kept up with the design evolution of other smartphones (not as thin, screen size hasn’t increased, new models don’t offer as many feature increases or innovations) and could slip as a result. The recent sales stumble of the iPhone was dismissed by Apple as happening because buyers are waiting for the next model. This means the Q3 sales figures for the iPhone are a real indicator for Apples future.
The portable audio market is dominated by the iPod. But the iPod isn’t like phones, tablets or personal computers because there aren’t major changes, upgrades or evolutions to spur repurchasing. How long until sales volume slips despite owning 65-75% of the market, especially in a tough economy?
Apple’s iTunes has 422 million worldwide users. Just the same, investors should watch that number (although Apple will make the figures hard to find if they do drop significantly) because music consumption is changing again. Thanks to websites like Spotify and Pandora, music consumers now listen to music they don’t own. The new attitude ‘why own music at all?’ could seriously hurt the profitable iTunes. Keep an eye on these numbers if you can and the zeitgeist for music consumption. Look what downloads did to cd's and music retail outlets.
The iPad may dominate the way the iPod did, but that means avoiding lawsuits and keeping up with innovation. The iPad is a computing device and Apple was just a niche computer maker that never had a significant portion of the personal computer market. The iPad could go the way of the iPod or the way of the Mac. Which way it does is crucial to future dividends and stock valuation.
Apple really needs another hit. Tech stock experts believe that Apple can only continue its ascent with another revolutionary and hit product in the next five years. The competition is increasing for all of Apple’s biggest revenue producers. The iPad is doing well but new products keep coming out. The iPod dominates, but will someone make a comparable and cheaper product eventually? The iPhone took a recent stumble and caused Apple’s recent earnings to be $2 billion below Wall Street expectations. Remember, Apple doesn’t have to fall as a company for its stock to devalue. If Wall Street gets concerned, that can do the job.
The valuation is around $600. It wouldn’t take much for that price to come down significantly (realization that iPods and iPads have saturated their respective markets, losing a major legal battle, losing ground in the cellphone marketplace, lack of a new hit product, stagnant or declining revenues, or a change in investor sentiment) but something spectacular must happen for the stock to rise significantly or dividends to increase. That is the true unknown that even Apple, a company that has shown a gift for controlling public perception, may not be able to address.
thedeswolf has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.