Bull Vs. Bear: Apple's Growth Plays Are Drying Up

By Stephen D. Simpson, CFA | June 18, 2012 AAA

Question: Is Apple a good buy at today's price?

Bear's Response
What Apple (Nasdaq:AAPL) has accomplished is truly remarkable. From a great growth stock to flirting with bankruptcy and/or a scrapheap acquisition, Apple has come roaring back to be the most highly-valued publicly traded stock on the market. Not only that, but Apple has essentially redefined the portable music player and mobile phone businesses and journalists and financial writers have made a cottage industry of trying to guess the next market that Apple will fundamentally upend.

But here's the thing - no growth story goes on forever. Apple has already shown some of the signs of a company transitioning to a more mature trajectory. There's a new CEO in place who is more manager than disruptor, the company has started to return capital to shareholders, and many analysts are no longer foaming at the mouth to project ever-higher price targets.
Those who think Apple is a still an outstanding buy today should consider the following risk factors:

Uncertain Market Leadership
Apple has never been the overall mobile phone leader, but the company has basically defined the smartphone sector since the launch of the first iPhone. That may be changing, though, as Samsung (OTC:SSNLF) has grabbed the market lead in smartphones. Now, this may not be a permanent transition - out of sync product launch cycles can drive significant share movements - but it is no longer fait accompli that Apple rules the roost.

Some of this can be tied to Samsung's improved performance, as well as Samsung's willingness to address a wider range of price-points. On the other hand, it also reflects a maturing market. There just aren't that many incremental or exclusive hardware features that companies can offer, and it is becoming increasingly difficult to stand out on the basis of hardware. Said differently, there was really nothing like the iPhone when it came out, but it's harder and harder to argue that the iPhone is dramatically better than the Samsung Galaxy.

How Many Fields Remain to Harvest?
Apple has pretty much always been a company focused on the higher end of the market. That means that Apple has to constantly look for new markets that have a large enough base of affluent customers to provide meaningful growth.

Cloud services (streaming media in particular), could certainly be a large market (as could in-car media), but the opportunity in areas like TVs or set-top boxes seems less appealing - people replace phones, music players, and laptops much more frequently than they do TVs or set-top boxes.

Uncertain Corporate Leadership
Tim Cook is a worthy executive to serve as CEO, but he's not Steve Jobs. Jobs was not only notoriously demanding, but also quite willing to push boundaries and redefine what Apple could, and should, be. I have no qualms or questions about Apple's ability to continue as a top-notch company under Cook's leadership, but I do wonder if Cook has the sort of mindset that will never be satisfied and will forever be pushing to find new solutions to problems that others don't even realize exist.

SEE: Steve Jobs And The Apple Story

A Hostile Ecosystem?
Apple may also find that its past operating strategies and philosophies have made it some enemies in the marketplace. Apple not only sells through retailers like Best Buy (NYSE:BBY) and carriers like Verizon (NYSE:VZ), but also through its own stores. While the days of exclusive retailing arrangements are long past, Apple's willingness to compete in the retail world gives other retailers no incentive to support the company a step further than absolutely necessary.

This may well prove to be true in the hardware, software and development world as well. Apple is notoriously demanding of its suppliers and may inadvertently be training its component suppliers to supply high-performance products for the next generation of rival devices. Likewise, as the world breaks into factions revolving around Apple, Google (Nasdaq:GOOG) and perhaps Microsoft (Nasdaq:MSFT), there will be battles to come over pricing, features and interoperability that could ultimately favor more open and collaborative rivals.

The Bottom Line
By no means am I claiming that Apple is doomed. Even if the company takes the unfortunate trajectory of Research In Motion (Nasdaq:RIMM) or Nokia (NYSE:NOK), there will be many more years of robust cash flow yet to come.

The question that investors have to ask, though, is whether there are enough large markets to continue to support the growth rates that Apple investors have become accustomed to over the last few years. Perhaps Apple can loosen up its price points and take wind out of Samsung's sales, or perhaps Apple can find a path in TVs that mitigates the infrequent purchase activity of hardware with more software/media revenue possibilities. In either case, it looks like Apple is going to have to reinvent itself at least one more time to keep the growth story going.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bull Side of this debate and weigh in with your opinion below.

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