Does Apple Have An Achilles' Heel?

Sep. 9.13 | About: Apple Inc. (AAPL)

Achilles' heel - n:

a small but fatal weakness

This is a weird article for me to write, basically because I've been a tried and true Apple (NASDAQ:AAPL) bull since the 90's. But, in the interest of covering both sides of the stories and "keeping your friends close, but enemies closer", I spent the better part of this morning doing some research as to whether or not Apple - which I argue to be the strongest and most innovative company in the world - has a deadly weak spot.

After Apple's recent jump on news of Carl Icahn disclosing his position in the company, it's been a mixed ride for Apple stockholders, as AAPL continues to mill back and forth on both sides of the $500 line.

Apple stock hasn't exactly had a ceremonious year, either. Apple has basically been on a roller coaster ride over the last year, and your satisfaction in your investment likely depends on when you bought in. While Apple has shed about 26% of its price over the last 12 months, it's only off about 6.5% for 2013 as a whole and has yielded about 12.8% (plus dividends) for those that have been holding for the past 90 days.

I argued in a past article that Apple's stock technicals indicate that it has broken out of its major "sub $460" slump, and is showing some signs of life of late - especially since Carl Icahn has disclosed his stake in the company. Carl, Carl, Carl - we'll get to him in a little bit.

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The State of the Apple Union

Before diving into potential Apple-killers, we need to have a good grasp on what's coming down the pipe for the company. We're coming out of the back end of "back to school" season, and Apple is notorious for getting the most out of it. As a company that continues to grow in popularity with younger generations, Apple has a real "pre-holiday" niche in back to school - generally offering pretty good deals, like offering free iPods to those who purchase Macs.

In addition, we have Mr. Icahn - after disclosing his stake in the company, looking for CEO Tim Cook to unlock some extra shareholder value. As soon as Icahn disclosed his stake, it became clear that he was interested in the company continuing to unlock some of its cash to add to shareholder value.

We're just days away from the company's major release of iOS 7. iOS 7 was announced at Apple's WWDC on June 10th of this year. It comes with a sexy new user interface and tons of general upgrades. It's looking like iOS 7 is going to be released officially on September 10th.

Aside from iOS 7, Apple is also expected to announce new products this fall. This is coming from Q2 earnings of this year, where Tim Cook alluded to new products.

The iWatch is coming, eventually, and is likely to overshadow Samsung's (OTC:SSNLF) recent release of its hideous looking smartwatch. Interestingly enough, I'm not even considering Samsung's smartwatch to act as even a potential Achilles' heel for Apple:

The iWatch we're all expecting, and have been for months, so there's no doubt it's going to be on its way.

But this isn't the only time that Apple is going to have someone rush in front of them to try and beat their thunder to market with a new product. Hell, that's been going on since Microsoft rushed to get the original Windows on the old NEC prototypes in Japan before Apple was going to launch the Mac.

For Apple, it hasn't really been about timing (possible exception being the iPhone), it's generally been about the quality of the product. Apple is of the mindset that they are producing the best quality and most innovative products in the world, and while they have a concern with shipping in a timely fashion, it's not what their model is based on.

Finally, earnings are coming down the pipe again and Apple's stock, from a technical perspective, seems to be on a bit of an uptrend after breaking the resistance at $460 that roped the stock back several times over the past few months.

3 Potential Achilles' Heels

1. Icahn Turning Into a Major Pain in the Ass

I thought that it was "a nice (selfish) gesture" that Carl wants more shareholder value from the company, but with Apple recently taking on its debt position and offering a buyback with increased dividend, the company shouldn't feel pressured to tend to Icahn's requests immediately and shareholders might be disappointed when Apple chooses not to honor Icahn's somewhat greedy request immediately. If Apple heads down this road, there's risk of management getting distracted and the company starting to spread its "shareholder gifts" too thin. Remember, the company just issued the biggest stock buyback in stock market history. Leave it to fund managers to take that as a cue to ask for more.

Just like his predecessor, David Einhorn, Icahn's stake in the company could potentially do more harm than good. After all, hedge fund managers aren't generally interested in the long-term well being of companies - they're more invested in making obscene amounts of money in the short term by whatever means possible. If you need to make yourself look like an "activist" on the side of the shareholders to do it, then that's what happens. (cue the Teldar paper stockholder meeting scene in "Wall Street" for a visual example.)

I immediately called this a "wrong" in my article the day after Icahn disclosed that he wanted more cash unlocked:

Wrong #1 - Pushing Another Buyback - Asking for a bigger buyback immediately after Apple announced the biggest stock buyback in market history isn't really a great move right off the bat. It's nice that Carl wants more shareholder value from the company, but with Apple recently taking on its debt position and offering a buyback with increased dividend, the company shouldn't feel pressured to tend to Icahn's requests immediately and shareholders might be disappointed when Apple chooses not to honor Icahn's somewhat greedy request immediately.

Again, it's nice that Apple's all grown up and has taken out a credit card and acknowledged shareholders - but you don't want to spread this part of your plate too thin, as it can eventually hurt the long-term value of the company.

2. Apple Shedding Market Share in Smartphones

The competition from Samsung over the past few years has really ratcheted up - to the point where Samsung has based its advertising solely on attacking Apple, and on occasion, the "cult of Apple". Apple's market share has sunk from 2012 to 2013 (using Q2 data), as Samsung remains firmly in the lead position, increasing its marketshare.

Many feel that this has to do with Apple not providing a lower priced phone. It's a possibility that at the coming iOS 7 release, Apple might address this issue (it's been alluded to several times), but left unchecked, this could be a problem for the company. This is a real problem, happening right now, that Apple would be foolish to ignore.

But, it's possible that they do ignore it. The Apple attitude was always akin to that of Audi or Volkswagen - sure, we don't have the market cornered, but the product is far superior and may not "be for everyone". Well, Apple is now in a spot where if it wants to catalyze its stock, it needs to create something that is "for the rest of us". Without this, it's likely market share could continue to taper off, taking Apple's stock price with it.

3. Ignoring Microsoft & Nokia

Alright - it means generally nothing to Apple right now - the merger, that is. But, ignoring what could potentially come down the pipe years from now could be extremely dangerous. I wrote about this in my article, "Now Is Not the Time to Sell Microsoft":

The big new news with Microsoft is it's announced purchase of Nokia's smartphone division - phones, patents, and the whole shebang. The two companies had worked together on the Windows Phone since 2011, and have a history together that makes this buyout deal, in my opinion, beneficial for Microsoft and a no-brainer for both companies.

So, you can file this one under "smartphones" as well. Microsoft (NASDAQ:MSFT) and Nokia (NYSE:NOK) have a partnership that has some serious potential to it. The products that they've created together, although not extremely popular yet - have received pretty good reviews across the board. It's possible that at this time, Apple has completely written off Microsoft as a company that it's now outgrown and beaten to a pulp - but that's not really the truth. Microsoft is still standing firmly on its own two feet and is addressing its biggest opportunity - its position in mobile. Apple needs to keep Microsoft and Nokia on its radar, as ignoring them both could potentially lead to a "sneak attack" from competition where Apple wasn't expecting it.

Outlook Going Forward

It is my contention that no matter what your position in Apple is, that you have firm grasp of both the bullish and bearish arguments. In the face of this, I'm still very bullish on Apple. However, these three items need to be paid close attention to, no matter what side of the Apple coin you're on. As long as Apple has its "radar" on and is able to see these potential problems before they happen, it should be just fine. But, the potential for an Achilles' heel does loom - just as risk exists in ANY type of investment.

It's been great perspective to identify some bearish arguments against the company, but QTR remains bullish here with an eye on these potential issues in the future. As always, best of luck to all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.