Shrinking margins and more effective competition are just two links in the chain pulling the tech giant back to earth, writes MoneyShow's Howard R. Gold, also of The Independent Agenda.
Last September was a great time to be an Apple (AAPL) shareholder. The stock topped $700, capping a remarkable run in which the shares practically doubled since July 2011.
Even more extraordinary, much of Apple’s huge advance came after the death in October 2011 of its founding genius, Steve Jobs. Nothing could stop this juggernaut, it seemed.
It’s been downhill ever since. From its closing peak of $702.10, Apple shares plunged by 37.4% as of last Friday, when it closed at $439.88. It’s bounced back a bit, but when the world’s most valuable company loses that much in just four months, something must be seriously wrong.
It is. Apple’s competitive position has seriously weakened, and investors are recalibrating their outlooks. Tailwinds have turned into headwinds as tangible and intangible issues alike weigh heavily on the shares.
Apple has lost the mantle of the greatest growth stock of our era; it may no longer be a growth stock at all. (The company said executives were not available for interviews.)
- Read about what Apple needs now on MoneyShow.com.
Here are four reasons why I don’t think Apple’s stock will see $700 again:
1. Growth in phones is slowing as competition increases.
The iPhone is by far Apple’s largest product, comprising more than 56% of total revenue in the first quarter of fiscal 2013. The 47.8 million phones sold, including the new iPhone 5, represent nearly a 30% year-over-year gain in units sold.
Sounds great, but growth has decelerated dramatically, from well over 100% year over year in the third quarter of fiscal 2011.
Peter Misek, an analyst at Jefferies & Company, who downgraded Apple to Hold last week, told me the smartphone market “has matured” and is “saturated.” He expects global smartphone sales to grow by 17% this year. That’s down from 60% or more in 2011. Apple’s chief rival, Samsung, also warned that the market is slowing.
Meanwhile, Samsung is gaining ground. While Apple’s share of the global smartphone market slipped a percentage point to 22% in 2012’s fourth quarter, according to IDC Worldwide, Samsung picked up a whopping six percentage points. It now leads the pack with a 29% share.
2. Margins are shrinking.
For smartphones, the big growth is in emerging markets, where Samsung and other suppliers using Google’s (GOOG) Android operating system are eating Apple’s lunch. That’s one reason Apple is reportedly working on a cheaper phone, maybe priced at $99 to $149, for emerging markets. The company hasn’t confirmed that.
And only half the iPhones sold by Verizon (VZ) here in the US in the fourth quarter were iPhone 5s, as customers bought older, deeply discounted models. (Unlike the iPad, iPhones are subsidized by wireless carriers, so customers pay a fraction of their true price.)
On Wednesday, Verizon’s Web site featured the iPhone 5 for $199.99, the 4S for $99 and the 4 for...free.
And the new iPad Mini may be cannibalizing sales of the larger iPad, lowering the average selling price by $101.
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Net net: Last week, Apple reported the weakest quarterly sales growth in 3 1/2 years, and the slowest profit increase since 2003.
That’s hurting gross margins—revenues minus cost of sales. Misek of Jefferies sees gross margins “staying below 39% and trending lower.” That’s down from their peak just below 45% in the fourth quarter of 2011.
3. Apple is losing its innovative edge.
Here’s an ominous sign: Apple isn’t as cool as it used to be.
Samsung launched an in-your-face ad campaign that showed prospective iPhone buyers wowed by a new Galaxy smartphone. Unlike Apple, Samsung makes several models a year, and it offers a bigger screen—a strong selling point.
Also, there have been relatively few big changes in the latest iPhone models, except for the Siri voice-recognition personal assistant on the 4S. Releasing a big new model every six months has forced Apple to make incremental, not fundamental, improvements.
Which brings us to the elephant in the room. Steve Jobs was a singular figure in American business, who combined marketing acumen with a highly developed design sensibility. He also was a hard-driving control freak who pushed his staff relentlessly to build products that were “insanely great.”
Result: Apple under Jobs produced five major technological breakthroughs—the original Apple II computer and the Macintosh in his first go-round and the iPod/iTunes ecosystem, the iPhone and the iPad during his triumphant return. ““There’s no company like it in history,” said Misek.
- Read Howard’s analysis of “5 Ways to Spot Tech’s Next Winner (or Loser)” on MoneyShow.com.
And although he left behind an outstanding team, including supply chain wiz Tim Cook, the CEO—and possibly a roadmap for future innovations—no one has the vision and sheer creative genius he did, or the manic perfectionism to make things happen. He is truly irreplaceable.
4. Apple may no longer be a growth story.
As margins shrink, earnings growth is tougher to come by. When the momentum stops, growth investors flee like rats from a sinking ship.
Although we haven’t seen their quarterly reports, I’ll bet some big growth funds dumped Apple shares by the boatload. Some analysts even speculate Apple is transitioning from a growth stock to a value stock (it trades at less than ten times projected 2014 earnings.) “It’s happening right now,” said Misek.
The company already pays a decent 2.4% dividend, and it has $137 billion in cash. Much of that is overseas, and would mean a hefty tax hit if Apple repatriated it to buy back stock, which the company already has started to do.
Tim Cook may be quietly repositioning Apple as a solid blue-chip stock. That would be a big blow to Apple’s image and the cultists who worship the company.
A dividend-paying Apple that buys back its stock like, say, IBM (IBM) might be a fine long-term investment, but it wouldn’t be worth $700 a share. And it wouldn’t be, well, Apple.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. Follow him on Twitter @howardrgold and read his account of the debate between Paul Krugman and Paul Ryan over whether there even is a fiscal crisis on The Independent Agenda.