Despite its poor performance over the past few months, Apple (NASDAQ:AAPL) remains a leader in technological innovation. And although there are plenty of doubts regarding the company, I believe the stock still has potential to exceed expectations this year.
The Tablet Market
Apple's principal concern here is market share. It is no secret that Apple has been losing market share in the tablet market. During 2Q12, the company ruled the tablet market with an iron fist, commanding a 64.6% share. Last quarter, data revealed that Apple's share dropped to 43.6% of shipments. Despite this, it still remains the leader in the global tablet market and also enjoyed a 48.1% shipment growth over the same quarter last year. The concern is now what Apple will do to solidify its position at the top of the tablet market. Apple is facing stiff competition from Samsung (OTC:SSNLF) and Amazon (NASDAQ:AMZN), but the big news last quarter was the advent of Microsoft's (NASDAQ:MSFT) Surface. Although the Surface offers "common functionality" to both desktop and mobile users, the tablet and its accessories are much more expensive than the iPad family and its complements. As per past years, expect Apple to release an iPad Mini with retina display, eliminating the main criticism aimed at the device, and a new 5th generation iPad that is lighter and thinner. The iPad refresh should serve as a catalyst for the company's stock.
Top Five Smartphone Operating Systems, Shipments, and Market Share, 4Q12 (Units in Millions)
4Q12 Unit Shipments
4Q12 Market Share
4Q11 Unit Shipments
4Q11 Market Share
Year over Year Change
Windows Phone/ Windows Mobile
Source: IDC Worldwide Mobile Phone Tracker, February 14, 2013
Apple's position in the smart phone market is ambiguous. Together, Google's (NASDAQ:GOOG) Android and Apple's iOS accounted for 91% of shipments last quarter, a record for combined share for these two operating systems. However, BlackBerry (NASDAQ:BBRY) and Microsoft are stepping up their games in an effort to penetrate this duopoly. It is clear that Android and iOS have solidified their grasp on the smart phone market, but Android is winning the race between the two forerunners. This leads us to the debate over the next iPhone.
The biggest talk right now is the iPhone "mini." Should Apple follow through with a cheaper iPhone, the company will be able to tap into emerging markets and also consumers with a smaller wallet. The new device could potentially expand its total addressable market by 55%. The smart phone market in China is starting to stabilize in terms of prices, which further underscores the iPhone mini's potential in China. One possible scenario is for the company to release the iPhone mini priced at $330 or approximately 2000 RMB. "Even in a scenario of low 40 percent gross margin and 1/3 iPhone cannibalization rate, which we view as conservative, the iPhone Mini adds incremental revenue and gross profit dollars," says Morgan Stanley analyst Katy Huberty. The release of an iPhone mini should also help pave the way for a deal between Apple and China Mobile (NYSE:CHL). Two other factors are (1) TD-LTE licenses and number portability legislation should pass later this year or in 2014 and (2) China would be more willing to subsidize higher-end smartphones on a TD-LTE network. The aforementioned three factors should provide the catalyst for an agreement between Apple and China Mobile, which would greatly enhance Apple's penetration into the Chinese market. Continuing the trend, expect Apple to also release an iPhone 5S in addition to the iPhone mini. Like with the iPad, the new iPhone products to be released this summer will also boost the company's performance.
In regards to a larger screen, there seems to be consensus that the iPhone 5S will not have this much desired feature. Apple simply has not worked out all the issues in implementing a larger screen, so customers will have to wait for the iPhone 6 next year if they want that 4.8" screen. What we can expect from the iPhone 5S though is an improved chip plus some other minor perks. Overall, the arrival of a low-price iPhone will surely stir up the smart phone market and give Apple the boost it sorely needs. But most importantly, the device will definitely remove any doubts regarding Apple's place on top.
Other Facts to Consider
Apple was recently named the number 1 smart phone vendor in Japan according to Counterpoint Research data. Part of this was due to strong marketing efforts from its Japanese partners, Softbank (OTCPK:SFTBF) and KDDI (OTC:KDDIF) in order to compete with market leader NTT DoCoMo (NYSE:DCM). As a result, NTT DoCoMo has expressed interest in partnering with Apple.
61 million (December 2012)
41 million (January 2013)*
31.6 million (January 2013)
Sources: NTT DoCoMo, KDDI, and Softbank. *Includes UQ Communications, an affiliated company of KDDI.
An agreement would allow Apple to tap into NTT DoCoMo's 61 million subscribers. And unlike in China, carriers in Japan subsidize smart phone purchases. There also would be no compatibility problems because NTT DoCoMo uses the same frequency as SoftBank for its LTE network. These two factors make a partnership with NTT DoCoMo extremely attractive for Apple.
Another catalyst is the online gambling industry. Online gambling in foreign countries is generating about $32 billion in annual revenue, which is almost as large as the U.S. casino market. Juniper Research predicts that online betting from mobile devices alone will be a $100 billion industry worldwide by 2017. Apple has already made the necessary software adjustments to accommodate betting games in Britain. An upcoming game that is pending Apple's approval is Claw Crane, a variation of the claw game found in arcades. While the U.S. version would use virtual money, the British version would offer cash prizes. The online gambling industry is an extremely young one with a huge potential to expand. Right now, Nevada and Delaware are in the process of laying the foundation for online gambling. New Jersey is expected to join these two states within the next few months.
Apple's game changer for the future is the company's entry into the wearable technology market. Last week, the iWatch evolved from talk in the rumor mill to a reality. Apple currently has 100 employees working on creating the device . This headline perfectly represents what has made the company successful. Apple has a track record of entering another market, revolutionizing it with a new product, and profiting greatly. Just look at what the iPod and iPhone did. Whether or not the iWatch can enjoy the same level of success is debatable. But the fact that Apple has set its sights on the wearable tech market is an extremely exciting development and one that will certainly create talk.
Apple stock suffered greatly toward the end of last year. The sharp drop in price dealt a severe blow to investor confidence in the stock. However, the company has been consistent in its knack for innovation and pleasant surprises. The iPhone and iPad, which generate 60% of the company's revenue, are still maintaining double-digit growth. After adjustments, compared to this time last year, iPhone and iPad units are up 35% and 62% respectively. Although the playing field has gotten more competitive, Apple is still performing well and has momentum. Apple still carries a lot of potential to perform well this year, and I remain confident in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Capital Traders Group is a team of Proprietary Trading and Equity Research Analysts. This article was written by Kevin Sun, one of our Equity Research Interns. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.