It's no secret that Apple's (AAPL) iPhone 5s and iPad Air/iPad Mini with Retina Display are doing exceptionally well this holiday season. People still love their Apple products, and I am completely cognizant of the fact that the company produces a remarkable set of products both aesthetically and functionally (I adore my iPhone 5s). With that in mind, however, it's important to keep both the tailwinds as well as the headwinds in mind when it comes to taking a long-term view of Apple. While the tailwinds are well known, and while I really do expect 2014 to be a great year for Apple, there are some risks that investors should keep in mind going into next year.
Beware The Samsung Galaxy S5 Hype
I completely get it - Samsung (OTC:SSNLF) pretty shamelessly copies just about everything Apple does. Some notable examples:
- Apple moves to high resolution "Retina" displays? Now Samsung is talking about 4K displays in smartphones.
- Apple does a gold-colored iPhone? Now Samsung is allegedly planning a metallic, special edition of its upcoming Galaxy S5, complete with curved screen.
- Apple's secret user experience sauce is in the refined software? Now Samsung is beating its chest about how it wants to go spend a ton of money on software-related acquisitions.
- Apple does a 64-bit ARM chip? Now Samsung is rushing to get one to market (when, let's be honest, these guys were probably planning for the move in the 2015-2016 timeframe).
The problem is that capitalism does not allow a "referee" to step in and tell Samsung to stop being Samsung. Samsung will copy whatever it sees selling well in the market, pour billions of dollars into marketing its "innovations," and continue to profit just as handsomely from the mobile revolution.
So, the thing to watch will be Samsung's Galaxy S5. While my personal expectation is that it will end up sputtering just as the Galaxy S4 did after its launch, it would be unwise for Apple investors to simply "ignore" this threat. If Samsung actually hits a home run with this product and takes meaningful share from the iPhone 5s, then this would short-circuit a major tenet of the long thesis (that Apple's high-end share is defensible/expanding in a market driven by low-end growth).
Beware Competing Tablets
Apple's tablet lineup is also incredibly compelling - the iPad Air is easily the best 10-inch class tablet available for sale, and the iPad Mini with Retina Display is quite competitive. However, with respect to the mini, it's a little troubling when I read things like the following passage from Anandtech:
The iPad mini with Retina Display has the same color gamut as the standard iPad mini, which is narrower than the iPad Air and less than the sRGB coverage we normally look for. The biggest issue here is that there are other smaller tablets in this price range that do offer sRGB coverage (e.g. Nexus 7, Kindle Fire HDX 8.9).
How on Earth does Apple think that it can get away with selling a $399 tablet with display quality that falls short of a $229 tablet from Google or a $379 tablet from Amazon.com? Yes, I understand that iOS is a much richer/more fully featured OS than Android for the vast majority of tablet users, and yes, I understand that there's more to build quality than the display. And, yes, I even understand that as far as performance goes, it's tough to beat the A7 found in the iPad mini with Retina Display. I get all of these things, but at the same time I worry that eventually consumers (clued in by the tech press) will eventually "catch on" to what's going on here and eventually move to competing products from players whose business models can support selling devices at cost.
Will Apple Get The iPhone 6 Right?
Quite frankly, the upcoming iPhone 6 makes me downright nervous. While Apple's "chassis updates" for its iPhones have gone over quite well, I do worry that the company may end up trying to follow the "phablet fad" and those who prefer smaller iPhones will end up being left in the cold. If Apple ends up doing what it does with the iPad today - offer, say an iPhone Air and an iPhone mini - then that'd be the best of both worlds, and I would expect Samsung to lose some meaningful market share at the high end. However, if the company ends up doing just one high-end phone, then unless it can strike the perfect size/form factor balance to appease both the Galaxy S/Note lovers as well as today's iPhone fans, there's some real risk there.
Now, I am also aware of the fact that Apple essentially spends its now fairly-sizable R&D resources on just a handful of devices so the engineers at Apple will probably get it right (again, I DO think 2014 should be a good year for Apple). It's just that when it comes to very fickle consumer tastes, nobody - not even Apple - is perfect and incapable of making errors.
No equity investment is without risk - not Apple, not Samsung, or any of the other companies that I talk about. While I do think Apple is a well-run company, and while I think the engineers/marketing folks at the company will "get it right" throughout the year, Samsung is a threat that should not be taken lightly, nor should Apple's ability to "get it right" be taken as a "given."
It's a tough market out there, and if I had to choose, I'd be LONG Apple rather than SHORT, but for now I'd rather be an observer.