Apple: The Day of Reckoning Might Not Be Far
Rahul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When Steve jobs was presented with the first version of iPod and told that it is state-of-the-art miniaturization, what does he do? He throws the iPod in water to check if the bubbles are rising. Apple (NASDAQ: AAPL) has always been on the forefront of innovation, but presently what we are seeing is not innovation but just evolution. We believe that while the form Apple came up with the original iPhone worked (as it was the largest screen size available at that time), now with Samsung and Nokia (NYSE: NOK) Lumia offering higher screen sizes, customers might switch sides. There has been increasing evidence that consumers favor big screens and we believe that while Apple has recognized this, a fear to deviate from the successful has led to minimalistic changes in the new iPhone model.
Don’t put all your Apples in one basket:
Talking about the faults with Apple, I believe that we must recall the old investment mantra: “Don’t put all your eggs in one basket.” While Apple has plenty of rabbits in its hat, it currently derives around 58% of its total revenues from iPhone 4. Further, what many failed to notice during the infringement battle between Apple and Samsung were the profit margins breakdown that was provided for the first time by Apple. Looking at the profit margins, we see that Apple derived considerably higher profits from iPhones in the US, with gross margins higher than 49-58%, while gross margins on the iPad were inferior at around 23-32% between October 2010 and the end of March 2012. While we believe that Apple offers a great product, we are scared of volatility as the business depends entirely upon the success of a single product.
Competition finally catching up or Apple needs to catch up?
Whatever some people say, I believe that technology is inherently fickle and Apple cannot get away from this fact. Looking at the examples, we have already seen Nokia turning to dust in a couple of years, Yahoo being overridden by Google (NASDAQ: GOOG), MySpace being displaced by Facebook and many more. The problem that the tech sector faces is the continuous change in user behavior. What might work today may not work tomorrow. Tech companies need to bring revolutionary products every year or so or consumers eventually get bored and switch to some other product. This is where Apple has lagged.
We believe that Apple is going to face increasing competition from Microsoft (NASDAQ: MSFT) and Nokia as they are developing the Windows 8 enabled Lumia 920. The new Lumia beats the iPhone5 on screen size, functionalities like Near Field Communications (NFC) and wireless charging. While diehard Apple fans point out that the NFC and wireless charging are absent, we believe that Apple has lost a huge user base, as the competitors have started providing these functionalities. We also believe that the delay in the NFC infrastructure will make it difficult for Apple to catch up with its competitors; iPhone app developers will only start working on the NFC applications when the functionality is launched in the iPhone’s next version. Further, while Apple’s A6 processor is twice as fast as the A5, the Qualcomm chips used in Galaxy SIII and Lumia are already twice as fast as the A5. In this light we can say that Apple is playing the game of catch up right now.
Samsung might be the main beneficiary in the Chinese markets
With US markets coming closer to saturation, Chinese markets remain a big whitespace opportunity for Apple. While Samsung has cashed in on this opportunity, increasing its worldwide share of the smartphone market from 17% to 32.6% last year, Apple's smartphone market share has slipped from 18.8% last year to 16.9%. We believe that it is mainly because of the low per capita income of the Chinese population with an added focus on specifications and value for money.
Additionally, although Apple currently holds the leadership position in the tablet market, we believe that the launch of windows 8 tablets might heavily eat into the market share of Apple. We are yet to see an iPad Mini from Tim Cook, but Google and Amazon already launched Nexus 7” and Kindle fire much earlier. We believe that the delay is only going to make it harder for Apple to gain entry into the small size tablet market. The continued success of Samsung has finally put Apple on the back seat and while we wait for the realization to dawn on investors' minds, we rate this stock as a sell.
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