Filed Under:
Tickers in this Article: AAPL, HPQ, DELL, MSFT, SNDK, T, NOK, MOT, VZ, VOD
First launched in 2001, Apple's (Nasdaq: AAPL) iPod sales reached a cumulative 88 million units in January 2007.

But, as the market penetration of the world's most popular MP3 player has grown, its year-over-year growth rate has dropped.

For the most recent four quarters, iPod sales rose 45% over the immediately previous year.

But, going back another year, the growth rate year-over-year was 285%.

Most analysts understand that even a popular consumer electronics device begins to crest as the number of new users shrinks. This certainly happened to products like the Sony Walkman and PlayStation.

Apple's stock has been trading between $85 and $90 over the last month and has not been able to move up out of that range.

After a run from $6.50 in April of 2003 to $86 in January 2006, the stock has made no progress.

Wall Street wants to know what product is likely to drive the next big run up in Apple's revenue.

One place to look for growth is the Macintosh, Apple's traditional answer to the PC. Unit sales of the Mac rose 28% in the quarter ending last December.

But, that still lags the growth rate of the iPod. And, unlike the music player which has a clear market share lead, the Mac is only about 5% of the global personal computing industry and has formidable competition from large companies which include Hewlett-Packard (NYSE: HPQ), Dell (Nasdaq: DELL), Lenovo, and Acer.

While the Mac continues to do well in the education market, its growth rate is unlikely to accelerate. And, in the last quarter, Mac sales were 25% of Apple's $7.1 billion in revenue.

Another possible growth engine is new versions of the iPod itself. Apple has come out with video versions of the player and smaller, less expensive adaptations.

But, Apple's success has not gone unnoticed by competitors. Microsoft (Nasdaq: MSFT) has entered the market with the Zune and has pledged to spend on marketing the way it did with its Xbox product. Other companies, lead by Sandisk (Nasdaq: SNDK), are also in the market with MP3 players that have most of the features of the iPod.

Apple is also falling victim of its own high market penetration. The iPod is a "closed system" -- the music for the device can only be bought from the Apple iTune store.

The player is not compatible with other music e-commerce websites and download services. The European Union has become concerned that this may constitute a monopoly and has indicated that they may begin investigations into how this affects consumer pricing.

So, this leaves Apple with the new iPhone, a handheld multimedia phone that will work on the Cingular network owned by AT&T (NYSE: T).

Apple is forecasting that it can sell 10 million iPhones in the year after it is released this June. The phone will sell for just under $500. Although the unit sales Apple is targeting would be less than 1% of the total handset market, the pricing is at the very high end for cell phones.

If Apple's sales figures are accurate, the phone could bring in $5 billion in its first year. Apple's revenue run rate is currently about $27 billion, so the affect of the phone would be significant, if it is a success. But, Apple will still be fighting the laws of large numbers. Its trailing twelve months of revenue is $20.8 billion. Fiscal 2006 (September 20 fiscal) revenue was $19.3 billion. The year before that revenue was $13.9 billion and was $8.3 billion in fiscal 2004. So, even an extra $5 billion will not keep Apple's growth rate at recent levels if iPod sales slow.

The iPhone's success has issues of its own. Large handset makers are unlikely to stand by and allow Apple to take customers in the most profitable, high-end, multimedia phone market. Apple will be up against Nokia (NYSE: NOK), Motorola (NYSE: MOT), and Sony-Ericsson. All three have the capacity to market their own multimedia phones and have leverage with the network providers like Verizon (NYSE: VZ), Vodafone (NYSE: VOD) and T-Mobile to push their products over a new offering from Apple.

The iPhone may be a success. No one can predict whether it will sell over 10 million units in its inaugural year. But, if sales of the new device are slow, it will be very difficult for Apple to keep its momentum, and its rising stock price.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus

Trading Center