Apple (AAPL) has been a great company. I have owned most of Apple's products, starting with a 128k Macintosh computer. I love my iPad. But right now I am not sure whether or not Apple can continue its stellar performance. The company is losing market share and without Steve Jobs, may not be able to develop revolutionary new products.
Steve Jobs was key
I remember sitting in a computer store with the store manager, back in the early 1990s, discussing whether or not Apple was going to go bankrupt. This was back when Apple shares were trading at $7, and Steve Jobs was no longer with the firm.
But Steve Jobs returned to Apple, created a multitude of innovative and desirable products, and the share price rose to over $700. He was a genius, able to imagine and create products that people wanted. But he's gone, and Apple is entering a period of uncertainty.
In my opinion, Apple's glory days could be over. If the company does not create new products that are sufficiently better than the competition, consumers will no longer pay the Apple premium.
Apple's business model is a ravenous machine
Here's how the Apple business model works:
Phase One: Apple invents a brand-new, first to market product, something that the world has never seen before.
Phase Two: Apple sells the product, at an extremely high price, and adds huge numbers to its bottom line.
Phase Three: Competitors copy Apple, and sell slightly inferior products at a huge discount to Apple's price. Apple loses a small amount of market share.
Phase Four: Competitors eventually design products that are as good as Apple's, but much less expensive. Apple loses significant market share.
Phase Five: In order to feed the machine, Apple is forced to develop another phenomenal new product the world has never seen.
This business model has worked for Apple because Steve Jobs was continuously developing amazing products. Without the new products, the Apple machine is like a starving animal that becomes weaker with time.
Apple's New iPad may not fly
Apple's new offering of a 128 gig iPad carries a starting price of $799. Are you kidding? Will anyone pay $799-$929 for an iPad? I won't! When it comes time to upgrade, I will probably buy a non-Apple product. In my opinion, Apple needs to be offering lower-priced products, not higher-priced ones.
Apple is losing market share
There's a great commercial that shows a young person waiting in line to buy the newest iPhone, only to reveal that he's actually saving a spot for his parents. The younger generation is much more excited about the Samsung (SSNLF.PK) Galaxy III with its bigger screen, multi-tasking and 4G capabilities. When a friend tells him he's saved him a place in line, one actor says "I've moved on" followed by the tag line "the next big thing is already here."
Yes I realize this commercial was generated by a competitor, but the commercial could be illustrating some level of truth. Buzz Marketing, a research firm that specializes in figuring out what youth want, stated that Apple has lost its cool factor among youth. "Teens are telling us Apple is done," the agency's founder Tina Wells told Forbes. "Apple has done a great job of embracing Gen X and older, but I don't think they are connecting with Millennial kids," who she said are "all about Microsoft (MSFT) Surface tablets/laptops and Galaxy."
In terms of smartphone sales, Samsung came out on top in the U.S. for the full year 2012. It took a 31.8% share of the market vs. Apple's 26.2%. LG (LG) took 12.3% for the full year. On a global level, Samsung is pulling ahead of Apple in the smartphone race, according to Reuters, which estimated that Samsung sold 61 million devices in the 4th quarter of 2012 compared to the 47.8 million iPhones that Apple shipped last quarter. At one time, Apple was leading the pack with smartphones, but that's no longer true.
Apple is also losing market share in the tablet arena. According to IDC, Apple's worldwide tablet market share would slip to 53.8 percent in 2012 from 56.3 percent in 2011, while Android products would increase its share to 42.7 percent from 39.8 percent.
The downward trend is also demonstrated in Apple's Mac and iPod business. Apple said it sold 4.1 million Mac PCs in the quarter, which is down from 5.2 million Macs sold a year ago. 12.7 million iPods were sold in the last three months of 2012, compared to 13.4 million iPods a year ago.
Right now we are just seeing the beginning of what could become a long-term trend. Perhaps some new genius will emerge in Apple's ranks, but I would not bet on anyone ever replacing Steve Jobs' level of practical creativity. It's amazing how important one person can be to a company.
Tim Cook's stance on computer touchscreens
In my opinion, Tim Cook was wrong when he indicated that touchscreens on computers were not a practical idea. Tim Cook's stance on touchscreens created a red flag that leaves me questioning his ability to foresee new product trends.
PCs beat Apple to the punch, and are already offering touchscreens on laptops, whereas Apple laptops are not providing touchscreens. Apple missed the boat. Touchscreens are one of the greatest inventions of this decade, and in my opinion, will be on most laptops in the future. For me, the ideal laptop will have a mouse pad and a touchscreen.
Apple TV may not save the company
Analysts talk about the possibility of Apple TV saving the company, but I don't see that happening. My limited experience with Apple TV has not left me impressed. Apple could come out with a spectacular new version of Apple TV that everyone will love, but we have no way of predicting whether or not that will happen.
What does the future hold for Apple?
In my opinion, Apple will travel down one of the following roads:
Number one: Apple fails to deliver any game changing new products. If Apple goes down this road, and keeps its premium pricing on all existing products, the company will die a slow death. At some point, Apple will become a "has been" in the eyes of consumers, and it will no longer be cool to own Apple products. In a desperate attempt to save the company, Apple will eventually lower prices, but by then it will be too late, and customers will just not be interested in owning Apple products. With rapidly declining sales, Apple starts losing money, and the company is eventually sold for pennies on the dollar. Shareholders are wiped out.
Number two: Apple fails to deliver any game changing new products, but continues to improve existing products, and lowers prices significantly. This is an interesting situation, because Apple will no longer continue losing market share, in fact it may gain customers due to the lower pricing and improve products. But, Apple's margin will decline significantly, and Apple will no longer be one of the most profitable companies in the world. At best, Apple shareholders could realize slight gains, but most likely, as margins fall, the share price will fall also.
Number three: Later this year, or early next year Apple delivers a phenomenal new product that the world has never imagined. Customers love this product, sales go through the roof and shares surge past $1,000. The most significant part of this scenario is that Apple's current team proves to the world that they can do what Steve Jobs used to do, innovate and market great new products.
I will only be a buyer if investor pessimism is amplified, and the shares plunge from here. At that point, I would be betting on a surprise Apple turnaround, and would expect to at least double my investment.
It's not too late for Apple, but if the company doesn't make a bold move soon, Apple shares could continue to slide. I personally hope Apple does continue to innovate, because I have been one of the company's biggest fans. But now, many of my devices come from Apple competitors. I am not alone in making the switch. Competition is gradually pushing Apple aside, as consumers realize they can get great products for a lot less money.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.