Apple (AAPL) has been one of the best performing stocks of the last two years. The stock has gone from $45 to $180 in about a year and a half, which is impressive especially given the size of the company. The nature of the rise was momentum trading at its core; however I must admit that the ascent was also supported by very solid fundamentals. The company has continuously beaten both its top and bottom line by a large margin, while Steve Jobs and his team has brought about some of the most revolutionary products of the last decade to the market.
As an equity investment, however, 
I think that Apple has found itself struggling with multiple headwinds lately and therefore I think the stock will perform poorly, at least relative to the overall market, in the mid-term. I detailed these headwinds below and I am curious to hear back from all of you Apple fans out there. I don’t trade the Apple stock but as a trading story the stock has really struck me as a case study and I continue to follow the news about Apple.
Headwinds
Market Cap Has Gotten Too Large To Expect a Similar Move like the Last Two Years: As of this writing Apple’s market cap is approximately 153 billion. As those of you familiar with the economics know, growth is a marginally decreasing phenomenon, especially percentage growth. In other words it is entirely a different story to go from 35 to 180 billion and 180 to 500 billion in terms of market cap. Think about it this way - Would it make sense that a company which has 5% market share in a sector which is tied to our discretionary spending with less than 10% of our total spending surpasses a company which services some of our largest needs and has much more market share. I mean Apple being a larger company than GE with only 5% market share in the electronics department, I doubt it.
Despite the Innovation in the Products, Product Range Is Not Very Diversified: In the past Apple has made some very good decisions in following the trend and sometimes creating the next big thing. However there still remains a risk tied to the product portfolio. For example, so much of the company’s fate seems to be tied to mobile devices and services. What if mobile is not the next big thing? What if people prefer a much smaller mobile device with only voice capabilities to a large one with a screen and a lot of data tools? Also, recent projections tie a significant amount of projected revenues to the App Store. I doubt that some of the largest gaming software developers like EA (ERTS) would allow non-professional developers to steal market share from them. If consumers really embrace this gaming on the mobile device phenomenon, I think major game developers would be quick to establish their own devices and own App Stores, through a joint venture with another prominent mobile firm.
So Much of Company’s Success Seems to Be Tied to A Single Person – Steve Jobs: I admire Steve Jobs very much for his talent. His marketing, innovation and product design skills are extraordinary to say the least. On the other hand as an investment his sole leadership of the Company, at least as the media and general public perceives it, constitutes great risk for the Company. We all saw how big of an event it was when rumors about Jobs’ health surfaced recently. To make the matters worse, he does have a history of a life-threatening disease which has a high rate of recurrence. If a public announcement about a serious threat to Jobs’ life were to be made I am pretty sure the stock would take at least a 30% hit in a single day, if not more. I am not sure that is the kind of risk you want to carry in your portfolio.
Apple’s Profit Margins are Decreasing As It Aims To Go Mainstream: Back in the day, I don’t know if you remember, Apple used to sell desktops at $2.999 while a comparable PC would cost you somewhere around $1.699 (a 75% premium). Then the iPod became popular and Apple would sell its devices for $399 while comparable device would have cost you $299 (a 50% premium). Now Apple is selling iPhones for $199 while a comparable device will cost you… well $199 (no premium at all). As you can see, as Apple aims its products more and more towards the mainstream its profit margins are falling. It is no fault of Apple that this happens, there are only so much people around who are willing to pay a 50% premium over a similar device just because it looks cooler and is a little more fun to use. Apple is trying to make up for its decreasing margins in the devices department through making use of the greater volume in its iTunes and App Store. However, if a serious attempt is made by Apple’s rivals in targeting its online stores Apple’s profit margins can be under serious trouble. In turn, an earnings miss could make a huge dent in Apple’s stock.
Economic Environment Will Most Likely Decrease Demand For Premium Products: This is mostly connected with the previous headwind. As people get more financially strained, discretionary premium products are the first thing to go. This is not a long time risk as the economic prosperity will return in a couple of years, however for the near future Apple might find it a little hard to achieve its top and bottom line estimates.
Of the five I have highlighted above the market cap argument, I believe, is the most likely headwind to present itself. The reason is, other headwinds might somehow be alleviated by good management and a little luck. However, I can’t think of anyway the stock can find its way around the market cap argument.
Another huge risk is, as I said for many traders the stock is a momentum trade at its core. So far although the stock has started to lag the market people are reluctant to short Apple, because people who have done so in the past got burned real badly. However, if the current market heads higher but Apple stock stays behind momentum traders will be quick to pull out of Apple in search of other trades like financials. Such a move by the momentum traders or an unlucky earnings miss might hit this stock really bad.
As I said I don’t trade Apple stock, however I am fascinated by its story, in the last two years especially, and would like to hear your comments on it. My perspective seems to be that Apple was a great company but it had its day and is in the past. Let’s move on.
Disclosure: None
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This article has 81 comments:
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bluemarlin1402
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9 Comments
Aug 29 09:05 AMYou're an idiot! There's a little thing called the iphone 3G that was just released, have you heard of it? It sold one million units in its first weekend of sales in one of the 70 countries it is available.
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tuskagee
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58 Comments
Aug 29 09:11 AM-
jsnovais
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11 Comments
Aug 29 09:24 AM-
glen engelmann
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8 Comments
Aug 29 09:33 AM1- market cap - who says apple needs another 300% gain in the next 1.5 years? 200% or 150% would be fine with me.
2-product range- in the last 1.5 years alone apple has added 5 new businesses (ultraportable, cell phone, wireless storage, app store, and movie rentals). what makes you think that they are done?
3- steve jobs- yep he is remarkable. and he is alive and well. the stock would certainly take a hit if he left, but people would not stop buying apple products.
4-profit margins- they are still way way higher than the competition. how much above the competition do you want them to be. your example of the iphone is very misleading. apple gets paid way more than $199 per iphone (the carriers around the world choose the consumer price , but apple gets paid big time either way).
5-economic conditions- you, like many others, have U.S. blinders on. it is a huge world and apple is expanding at a tremendous pace globally. how can you not know this? also, the U.S. economy has been suffering for quite some time now and apple keeps reporting record quarter after record quarter. imagine how apple will do as the U.S. and global economies pick up!
your article just seems to be a summary of all the negative rumours and speculation that surrounds apple without any real thought to the truth. the truth, for the last several years, has disproved every negative "report" about apple. what does that tell you?
good luck on your search for the truth.
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bluemarlin1402
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9 Comments
Aug 29 09:34 AMVery rarely do I argue with someone as clueless as the author of this article but I'd like you do to do two things, Google "iphone component cost" and "iphone subsidized price". Now, tell me how profit margins are falling.
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ineoeni
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1 Comment
Aug 29 09:35 AMHere are some counterpoints: 1) To not being diversified - In the quarter ending June, Apple made about 50% of their money from their Mac business line, 23% from the iPod, and 6.7% from the iPhone (this % should increase steadily each month to the 20-25% range). The balance (~20% is from software, services, peripherals, etc.). While they are not as diversified as GE, they are no less diversified than most companies that are NOT conglomerates. As a comparison, the most diversified computer company that comes to my mind is HPQ - they make 36% of their revenue from "Storage, servers, and services", 35% to personal computers, and the blance in printers. Clearly, Apple is just as diversified across "different business segments", but the clear difference is Apple is levered to the consumer. Your diversification point is most applicable to the fact that their consumer base is nearly wholly the retail consumer with some education, without many small businesses or corporations (relative).
I think you know better than to compare margins across time between different products. You compared the margins betwee the Mac, iPod, and iPhone all in one paragraph - which is in no way indicative of a trend. While Apple is reducing margins to gain market share (at just the right time when their competitors continue to have difficulty - Dell just missed numbers), their margins to this point, have not changed substantially. a 15" top of the line MacBook Pro is $2,500. You can get a similarly equiped Dell for half that. (100% premium today). iPods continue to sell at a premium to their peers. Also, remember, Apple doesn't care what the consumer pays - they care how much moeny they get from the likes of AT&T and others. When they first sold, Apple made $600 plus lets call it $400 of revenue share - so $1000. Today, they are speculated to be selling them for anywhere from $500 to $800. This is a decrease, but no different from any other mobile company. Most importantly, mobiles are not priced as on what their competition is priced at - it's often times how new and "hip" the product is (Razr anyone?)
Clearly, the company needs a published succession plan for Steve Jobs. They won't do that, but instead, the public face of the company will change over time. Remember that keynote at the Dev conference - how much did Steve actually talk? yes, it was different because there were developers there, but, Steve didn't even introduce Mobile Me. As new products come out, and the company gets bigger, we will get more familiar with other parts of the organization, and hopefully, the combination fo 3 or 5 of them will give us confidence in the sustainability of the company ex-Jobs.
Also, check your math, the last time Apple was anywhere near $45 was in July of '06 (over two years ago), and it bottomed out at $50, not $45.
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PK de C'ville
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98 Comments
Aug 29 09:35 AMThe most interesting thing about Apple is it has a chance to be 'Attila the Hun' in several huge markets at once: Mobile, Notebooks, Music and Video sales, rentals, subscriptions (coming), and finally, Tablets (wait on this).
So, all this begs the questions: How quickly will free cash flow per share grow and will it be as grand as the past 5 years?
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fauxscot
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9 Comments
Aug 29 09:49 AMI won't resort to calling names, but boy, I must admit to agreeing with the prior posters... you seem to have drawn tenuous conclusions from your dubious premises.
Market cap? Sure, I'll buy the disconnect between Apple and some other folks. This outfit is generating some serious cash, though. Billions and billions of it. The company projects this to continue, and regardless of its current overall market share, and/or the state of the PC market at home, there is abundant room for growth in sales from just capturing additional market share. The products are highly desirable. They are day and night better than PC/Microsoft combos, and the company has figured out how to service its customers so well it occupies the TOP SLOT in customer satisfaction.
Have you used one of these things? Good god, man! Eveything they touch gets better. Hell, the even reinvented the concept of backup, with their simple, obvious, and bulletproof Time Capsule/Time Machine combo. They finally fixed one of the biggest headaches in all ConsumerCOmputerLand..... the need for reliable and simple and transparent and fast and useable (and wireless!) backup of data and program. Cheap. With decent margins. Equivalent windows hardware has to be cobbled together with the disparate products of companies that don't talk to each other.
The examples of greatness in this outfit are legion. I think you'd be well served to consider how much of a game changer they are, then revisit your arguments.
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spaceage
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11 Comments
Aug 29 10:01 AM-
Just a stock owner
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1 Comment
Aug 29 10:01 AMAnd no doubt enter the PC (currently <<10% share) and video market (just starting) much further and I can finally kick out all this set-top-boxes and simply stream TV through iTunes, play music, foto's, look videos, browse internet, play games, etc. etc. and I'll I need is my apple-TV and touchscreen interface (iphone, ipod touch, touchbook or any other apple device that has touchscreen).
Look further into the potential and you'll see they are miles ahead and a huge territory in front of them still. And look who's buying into their products, I have no doubt this company will become one of the most important companies in the world in 5 years time.
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Rawky
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5 Comments
My Website
Aug 29 10:03 AM-
mag
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28 Comments
Aug 29 10:03 AM-
Oh Blah Dee Blah Dah
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68 Comments
Aug 29 10:07 AMExxon Mobil and BP had approximately $40 in annual profit. A few decades ago, $40 billion was the entire ANNUAL REVENUE for a top S&P 100 company.
The world in this time went from 2.5 billion people to over 6.5 billion people. Populations are expanding, world prosperity is expanding, and world markets are expanding.
Apple has the potential to be one of the first TRILLION dollar revenue companies.
Information, together with processing of it, accessing it, and transmitting it, is the OIL of this age. And, the world is in the very early stages of it.
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RE: "Would it make sense that a company which has 5% market share in a sector which is tied to our discretionary spending"
This is a STATIC viewpoint. Apple itself is growing many times that its markets are growing. You comment is like viewing yourself at a red stop-light and saying that you are not going anywhere because the light is red. ALL reports show that Apple is dramatically increasing market share and unit sales of its primary product lines.
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RE: "Despite the Innovation in the Products, Product Range Is Not Very Diversified"
Apple is in computers, software, communications, mobility, graphics, video, publishing, information storage, networking, etc.
All of these are modern day categories. No buggy whips are in these areas.
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RE: "What if mobile is not the next big thing? What if people prefer a much smaller mobile device with only voice capabilities to a large one with a screen and a lot of data tools?"
Mobile IS the next big thing. And, it will continue to spread around the world for MANY years.
People HAVE had a much smaller mobile device with only voice capabilities. They are called CELL PHONES. People now realize that they need MORE than just voice when they are moving around. That is why MOBILE is the current big thing and will continue for many years to be the BIG THING.
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RE: "So Much of Company’s Success Seems to Be Tied to A Single Person – Steve Jobs:"
Apple has approximately 20,000 employees. Do you really think Jobs does EVERYTHING at Apple. Jobs is a visionary and a great leader, however Apple has succeeded because it continually hires the best people and motivates them to do their best.
Countries and companies have had a visionary leader at some time, and these countries and companies have continues success. After George Washington died, the U.S. continued to be successful for the next 200 YEARS.
Founder Watson of IBM died and IBM continues to be one of the consistently successful companies in the world.
Giving all credit to the conductor of a musical performance is not only unfair, it is very wrong. Jobs is the orchestrator of Apple, and will always be recognized for that. However, he cannot do the work of 20,000 employees. OTHERS do make a big contribution.
Recently, in a interview, Jobs said part of his responsibility was to fire someone who was not performing. Jobs recognizes that have the right person in the right job is essential to top performance. This is one of Jobs contributions to the success of Apple.
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RE: "It is no fault of Apple that this happens, there are only so much people around who are willing to pay a 50% premium over a similar device just because it looks cooler and is a little more fun to use"
Apple computers in price comparison to Dell have recently been shown to be CHEAPER than Dell in some cases. There are over 6 BILLION people in the world and not all of them want the cheapest crap on the market.
Dell's financial report last night showed a big revenue gain and a big drop in profit margins. Despite a common belief, computers are not really a commodity. When you spend a large part of your life on a computer or a mobile phone, you tend to want something that is easy, pleasurable, and productive to use. Apple excels at these qualities.
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RE: "As people get more financially strained, discretionary premium products are the first thing to go."
Tiffany's reported excellent financial results two days ago, and RAISED its forecast for 2008 and 2009. I have yet to read that jewelry is an absolute necessary component of life, yet Tiffany's is growing in a global downturn.
Today, mobile SMARTPHONES and NOTEBOOK computers are an ESSENTIAL part of life. Everything we do involves use of or need of these two products.
If Tiffany can grow in this economy, Apple has an even more essential contribution to make in one's personal and business life.
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roadracer
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12 Comments
Aug 29 10:18 AM-
sfhc21
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6 Comments
Aug 29 10:22 AMLet's continue to poke holes in his arguments:
1. "I mean Apple being a larger company than GE with only 5% market share in the electronics department, I doubt it."
When Apple is still doubling it's earnings (counting deferred revenue up front), not that difficult. You see, there comes a firm belief from many of us that Apple will be the computer of choice in five years. It will overtake Microsoft. Apple will overtake GE in marketcap. Apple will become the biggest company in the world by owning our entire digital life.
2. "What if people prefer a much smaller mobile device with only voice capabilities to a large one with a screen and a lot of data tools?"
Not gonna happen. It's about convergence in the future. But even if so, then Apple will make one that's easier to use than any other competitors device. It's the beauty of Apple. They don't necessarily start trends. They see where they are going, and do it better than anyone else.
3. "Recent projections tie a significant amount of projected revenues to the App Store."
A few. But not enough revenue to significantly affect earnings.
4. "I think major game developers would be quick to establish their own devices and own App Stores."
[sarcasm]Right...becau... EA made their own Nintendo DS.[/sarcasm]
It's all about convergence. No one wants to carry around 3 or 4 different devices in their pocket. That's why a "smaller mobile device with only voice capabilities" is not the future.
Game developers will embrace the iPhone. Period. They aren't going to make their own device, especially given the costs and since the App store isn't a profit maker anyways.
Apple's whole business model has been to use iTunes, to use the App Store to sell hardware...iPhones, iPods, Macs. That's why so many other online music services have failed, because the service in itself isn't that profitable.
5. "Apple is trying to make up for its decreasing margins in the devices department through making use of the greater volume in its iTunes and App Store. However, if a serious attempt is made by Apple’s rivals in targeting its online stores Apple’s profit margins can be under serious trouble. In turn, an earnings miss could make a huge dent in Apple’s stock."
Remember that the iPhone isn't just $199, but that it's getting at least $200+ per device from the carriers. So technically, it's margins are not decreasing on that product at all.
Second, Apple's rivals have seriously tried to make a dent against iTunes. Microsoft, Dell, Napster and they have all failed!
6. "As people get more financially strained, discretionary premium products are the first thing to go."
Possibly. But cell phones are no longer a discretionary product. I think as things get tighter, consumers will get smarter.
What will get canceled is satellite radio services as you can now access programs and radio on the iPhone itself. Satellite TV and Cable will get canceled because you can now access just the shows you want through AppleTV and the iPhone.
Convergence!
Heck, even a MacBook or iMac will save you money because of all the software that comes with it.
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FreeRange
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70 Comments
Aug 29 10:23 AM-
Camden
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73 Comments
Aug 29 10:27 AMThis guy has a "Chicken Little" mentality.
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tuskagee
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58 Comments
Aug 29 10:35 AM-
win
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39 Comments
My Website
Aug 29 10:52 AM1) Big numbers - If Apple overtakes PCs as the dominant computers worldwide, this is not a concern.
2) Jobs' health - In my view, this is only a short-term concern and only a serious concern for the next two years or so. If something happens to Jobs within the next two years (I pray that nothing does), I and every idiot out there will short Apple for one month or so. Then there will be others in Apple who will take over. There ARE others, who are very prominent within the company. Within the next two years these others will become more and more prominent without.
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frdm45
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6 Comments
Aug 29 11:06 AMThere were however some excellent counter arguements and I commend the authors of those posts, but who am I to pass judgement?
I have heard however that recently many customers have complained of connectivity issues with the 3G phone which see it default to the lower bandwidth signals (please excuse my tech ignorance if anything in the previous sentence is technically incorrect).
Anyway, if you have something interesting or at least semi-intelligent to say we'd all love to hear it, otherwise keep the elementary school insults to the schoolyard or other sites where such low class verbiage is acceptable.
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uncle
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15 Comments
Aug 29 11:21 AMIf you really believed any of these talking points you wouldn't have bothered to even write the article....
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Tiffy
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4 Comments
Aug 29 11:41 AMIt doesn't mean Apple will crash. But it could. It could also triple its market cap. But what is sure is that it is a risky investment.
Who can be sure that Apple will always produce the best / most attractive products ? Nobody, even Steve Jobs. Of course Apple will do its best, but they are not gods, other companies could do better.
Note to Apple fans : when Steve Jobs left Apple and founded NeXT Computer, he created the best existing computer. Far more advanced than all Windows and Mac computers. Without success... the company crashed. He then came back to Apple and a few years later launched Mac Os X, which was largely inspired by NeXT Os. It has been a success. I am sure Steve Jobs is one of the best placed person to talk about the uncertainties of success.
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mzt
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2 Comments
Aug 29 11:47 AM-
Bonemesly
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4 Comments
Aug 29 11:53 AM-
Brandon
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77 Comments
Aug 29 11:59 AMThis is speculation not fact.
"Market Cap Has Gotten Too Large"
Totally agree, but there is still a lot of growing to do... Stock will go up, but not as much.
But....you're forgetting one thing. The Living Room.
More than any other consumer electronics company, Apple is positioning itself to make mountains and mountains of money off of devices that connect to the tv. The very thing that you say is a weakness in the end will be Apple's strength, lack of diversification. Eventually one company is going to have a superdevice that allows you to watch and record live TV, download music, download movies, surf the Internet, a God knows what else easily. Apple is the only company that can do this and not lose money.
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dithers
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56 Comments
Aug 29 12:33 PMIt has a Unix-based OS that has been universally acknowledged to be the best around, by a country mile.
Its computers can, and do, run Windows as well as OSX - thats a difficult combo to beat.
Its iPhone is so much better than everything else, its not funny.
People need computers - Apple takes 66% of all computer purchases over $1000 - and thats why they make huge profits.
They have around $25 billion in cash, no debt. Same as Microsoft.
They are the USA's biggest retailer of music, on or offline.
Most movies are made with Mac computers and Apple's 'Final Cut Pro' professional editing suite.
Almost all students are now buying Apple laptops.
They are eating Dell and HP's lunch.
Growth may slow, but then how can it continue at over 50% per year?
Expect solid growth for the next five, and then look at the picture.
B that time, they may have 40% of the market, which will be huge because they sell both hardware and software - making them almosts impossible to beat.
The development of Apple since they built their new OS almost 10 years ago underpins all this - they have built an Operating System for the next 25 years.
Now they are reaping the harvest.
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TA
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345 Comments
Aug 29 12:42 PMI had to laugh when I read that.
I guess the author hasn't posted here before and had no idea what an article that's not super positive will draw in terms of comments for the moronic fanatics that haunt this site.
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ChopinBlues
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1 Comment
Aug 29 12:50 PMJust ask yourself this simple question: Do you really think Dell wouldn't trade places with Apple in a heartbeat?!
And these people call themselves 'analysts'! Who pays these clowns?