11 Reasons Why Apple Could Fall in 2011

| About: Apple Inc. (AAPL)

After revolutionizing the technology of media and personal electronic devices for the 21st century, staging one of the greatest comebacks of any company in history, and dominating consumer and investor attention for the past five years, Apple (NASDAQ:AAPL) may be setting up for a hard fall.

Down and almost out, Apple was nothing to be too excited about 10 years ago. Its Macintosh computers were the bulk of its product line, and PCs were in almost full control of the market. But with the invention of the iPod, which revolutionized the way we listen to and buy music, Apple began its road to recovery - which eventually led it not only to recovery, but to domination as well.
It’s hard to even imagine what things were like before the iPod. Walkmen, CD players and far-inferior MP3 players would be almost embarrassing nowadays in comparison to the iPod, which has become the icon for music devices in the past few years. And the addition of the iPhone to Apple’s product line was met with almost hysterical excitement, as lines outside of Apple stores became a common occurrence. Add to that a consistently-innovated computer and laptop line, thousands of “Apps” for the iPhone that allow people to do anything from looking up restaurants to turning on their cars, and the seemingly never-ending hype as to what Apple will do next, and it is obvious why Apple has been able to build such a powerhouse out of its brand.
But as is the case with every company, story, and fixation, the party eventually ends. Things can’t improve and improve and improve and improve forever. At some point, what was once popular becomes second-class; what was once innovative, becomes old-fashioned; what was once a well-kept secret becomes a monotonous, repetitive idea that offers no benefit.
What I’m saying is that at some point Apple will no longer sit as loftily as it now does. It could fail to innovate, fail to care for its customers, or simply fail to meet expectations. And when that happens, we can expect “Apple lovers” to snap out of their whole-hearted faithful love-affair, wreaking havoc on the stock price if not also sending the company into frenzy. There is no doubt that Apple is one of the greatest companies in the world, with some of the greatest consumer products and revolutionary technologies. But at what point does the fun end?
11 Reasons Why Apple Could Fall in 2011
1) Price Run-Up. Less than eight years ago, you could have bought Apple shares for $7. Today they’re sitting at an all-time high above $325 – more than a 4,600% gain!
Take a look at the following chart:
Click to enlarge

As you can see, there were plenty of opportunities to buy Apple if you missed the first moves: early 2006, early 2008, late 2008-early 2009, and basically at any point before today. The stock did not move straight up without pause; it offered investors numerous chances to jump in.
But after a 4,600% move, now sitting at all-time highs, and especially after such a steep rise since early 2009 – is there really that much room left to go? Aside from the fact that there are probably plenty of other investment opportunities that will outperform Apple, could such a meteoric rise in stock price continue for that much longer?
2) Market Cap. With a market cap of over $298 billion, Apple is now the second-largest company in the world. It recently became the world’s largest technology company, moving past Microsoft (NASDAQ:MSFT), which was once in a similar position that Apple finds itself now.
Besides for the fact that Apple is by no means the market-share leader in computers or phones, there is one much bigger point that just stands out in my mind. The market cap of Apple is equal to the market caps of IBM (NYSE:IBM), Hewlett Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) combined!
Moreover, it is hard to argue with the claim that it is much harder for a large company to grow as quickly as it did leading up to that point. In other words, as hard as it is to double a company’s market cap from $50 million to $100 million or from $10 billion to $20 billion, it is exponentially harder to take a huge company like Apple and grow its market cap from $300 billion to even $400 billion. Large corporations are sometimes like large, heavy objects much harder to move.
3) CEO Steve Jobs. Undoubtedly the most prominent figure in Apple, if not the entire technology space, Steve Jobs has been the mastermind and visionary behind much of the company’s success. Yet while Jobs should be granted the utmost credit for his achievements, two issues could still derail the company.
First, his health is of major concern to the future of Apple. In 2004, Jobs announced that he had been diagnosed with pancreatic cancer. His health has been repeatedly scrutinized over the past few years, with Bloomberg even mistakenly publishing a 2,500-word obituary of Jobs in 2008. In April 2009, Jobs underwent a liver transplant, further pointing to the heightened issue of his health.
What happens if Steve Jobs is no longer able to lead Apple? The man who has been behind Apple’s revival and surge to the top of the technology world is seen by many to be vital to Apple’s continued success. Yes, he has established a very strong foundation on which the company can continue to build. But the loss of his vision and continued leadership will hurt the company in the short-term if not put a major damper on its growth in the long-term. Even if strong leadership is available to replace him, you can surely bet that many stockholders would be selling their shares if anything were to happen to him.
The second issue, which has been the downfall of many powerful men and innovative companies, is Jobs’ arrogance. Jobs has downplayed Apple’s surpassing Microsoft in market cap, rejected Adobe’s (NASDAQ:ADBE) Flash technology for use in his own company’s products, and bashed competitors like Research in Motion (RIMM) and Google (NASDAQ:GOOG). His arrogance has obviously brought him the success he now enjoys, but some of the excessive and unnecessary arrogance he may be guilty of could prevent Apple from taking part in new ventures, new ideas and new partnerships, and could even make Apple a target. One of the most important rules of wisdom and success is being open to new opportunities and not thinking that nobody else can offer good ideas. We’ll see how this one plays out.
4) Extreme Expectations. After shattering analyst estimates again and again, expectations for Apple are higher than ever. They just haven’t ceased to amaze almost everyone with their record numbers, continuous innovation, and growing grasp of market share. There simply is no company out there like Apple.
But after exceeding investors’ expectations time and time again, is Apple setting up for disappointment? With 47 out of 50 analysts covering Apple maintaining a “Buy” rating and the remaining 3 a “Hold” rating, it’s hard to say investors could be any more bullish than they already are. Almost no one dares to bet against or even speak poorly of Apple; analyst price projections are hovering in the $400+ dollar range; and with Apple touted as everyone’s favorite stock for years now, it could be that all the high growth, big expectations, and future opportunities are already priced in. What happens if Apple slips or even just fails to meet the sky-high expectations that have been set for it? It’s understandable that Apple will drop if it completely screws something up; but what if it just fails to exceed expectations? After exceeding expectations for years, investors’ won’t settle for just meeting expectations. If Apple can’t continue on its course for growth, and do so in tremendous fashion, it could begin to lose its luster. And if it loses its luster, you can bet that many of those invested in Apple will begin to pull their money out in search of better investment opportunities. Nobody remains a crowd favorite forever.
5) Anyone Left to Buy? After dominating the headlines, media coverage, and the minds of investors for years, is there anyone left who hasn’t bought Apple yet? Almost every fund and institution is invested in Apple; your grandmother is probably invested in Apple. If it’s no longer a well-kept secret, is it really a great investment anymore? And is there anyone left to swear to it? With all the opportunities to invest in it, I find it hard to believe that there are that many people left to buy it. Anyone who has wanted to already has. And though there may be some investors who may get into it again or even for the first time, there is a higher chance that those who own it will sell it at $325 - the new investors would, in effect, be buying from those who have owned it for a while. Smart money will be selling to last-to-get-in investors.
6) Declining Quality. Apple used to be known for its product quality and customer service, but lately it appears it has been cutting some corners. Understandably so, as Apple tries to grow rapidly and has to keep up with demand and strict time schedules, it sometimes comes across some issues, such as getting its products out on time. But at the same time, a company that grows so quickly sometimes can’t keep up with quality and customer service; it simply doesn’t have the time or resources.
And where did we see this happen? The iPhone was shipped out as soon as possible, and ended up having faulty antennas. To make matters worse, Apple refused to recall the phones and shipped out iPhone “bumpers” instead. Moreover, many iPhones are functioning poorly - just ask some of your friends who own one. iPods have been dying on people for years, for no apparent reason. I’ve even heard people complain about the laptops recently - something Apple has never had problems with. And now, the iPad has been made with a reflective surface, which makes it almost impossible to use in the sunlight - how can anyone take it to the beach or use it outdoors? The Kindle, on the other hand, is made with a non-reflective surface, and avoids these issues. Apple must address these issues and keep up with quality control, or it faces the threat of losing loyal customers.
7) Innovation? Apple is where it is today because it was able to introduce revolutionary products and continuously innovate them. But after a few generations of iPods, iPhones and laptops, innovation is somewhat lacking. It’s just not that easy to continuously improve on an already-successful product. Take the iPod, for example: it started off as a music-only, black-and-white display device. Then came color, video, internal speakers, touch-screen, Internet, and many other features. But what else is really left? Much of the good features have been introduced already. Many have therefore claimed that the iPods, iPhones and computers are now part of Apple’s core product line – meaning they will continue to grow, but fairly steadily.
The iPad is supposedly Apple’s new focus. I will admit that it’s an interesting and probably useful gadget. But is it really as innovative as investors believe it to be? To an extent, it’s really just a big iPhone or small laptop. And it also cannibalizes some of the iPhone, iPod and laptop sales. Since it offers very similar features to Apple’s other products, there is not much benefit in owning the iPad if one owns the iPhone, iPod and laptop. The iPad may just have been the result of Apple’s dire need to innovate, but innovation may have plateaued.
8) Competition. Apple has hogged the spotlight and much of the smartphone and tablet market. But as other companies see the benefits and opportunities in the space, they will begin to ramp up the competition. The Android and the Blackberry continue to be threats to Apple’s iPhone market share, with Android actually growing faster. The iPad’s relative success also has interested companies like Samsung (OTC:SSNLF), HP and Research in Motion to introduce their own respective tablets. It’s only a matter of time before Apple loses its “first-to-enter” role and faces the reality of a market with increasing competition. Another sign of Apple’s struggles is its recent sale of iTunes gift cards for less than their face value. Best Buy (NYSE:BBY) recently sold $50 iTunes gift cards for $40. A 20% sale seems pretty desperate; it tells me that even Apple doesn’t believe its prices are justified. Apple does have the ability to remain on top and offer the most appealing products, but it definitely won’t be easy as it has been until now. And that could easily send the stock price lower.
9) Hacking and Viruses. Unlike PCs, Apple computers have been known to be very resistant to viruses. While PCs have been plagued by hackers, viruses and other similar issues, the Apple system has been relatively safe. But as Apple computers continue to sell at an increasing rate, viruses and new problems are more likely. And if Macs begin to wear down at a quicker rate, they could lose some sales. My strategy has been to buy three PCs for the price of one Mac. Apple computers are just too expensive to justify, in my opinion; I’d rather buy three PCs over the course of a few years for the same price I’d be paying for one Apple laptop. That way, if I get a virus on one computer, I can just buy a new one without worrying about all the money I’ve spent. Unless Apple can continue to protect itself from viruses and maybe lower its prices a bit, it may face some fierce challenges.
10) Weight in S&P 500 and NASDAQ 100. As Apple shares continued to rise, they have carried the broader market and indices with them. Apple is second only to Exxon (NYSE:XOM) in the S&P 500 in terms of weighting, and makes up over 20 percent of the NASDAQ 100 (QQQQ), equal to the weighting of Microsoft, Google, Oracle (NASDAQ:ORCL), Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC), Amazon (NASDAQ:AMZN), and Research in Motion combined.
That means that for every one percentage point that Apple gains or loses, its impact on the NASDAQ 100 equals much bigger moves in any other individual stocks or even an equal move in the 6 next-biggest companies. In other words, the market and the indices heavily depend on Apple to continue to carry them upward; if Apple begins to fall, it will drag the rest of the market along with it. And regardless of how the other companies are doing, if investors start seeing the market drop, they are prone to avoid the market. Also, Apple’s weighting in the index will be up for review if its weight reaches 24% of the index. If that does happen, Apple’s weighting will be reduced, which will in turn result in less broad-market ETF money being invested in Apple. Right now, money being invested in the NASDAQ 100 through the QQQQ is being allocated heavily to Apple; if Apple’s weighting is reduced from 20%+, however, less money will be allocated to it, which could result in a weakening stock price.
Apple’s heavy weighting in both the S&P 500 and NASDAQ 100 make it the benefactor of a large portion of ETF and broad-sector investments, as allocations are based on a stock’s respective weighting. But at the same time, Apple’s heavy weighting makes it susceptible to a big drop if investors pull out their index ETF or funds, or if Apple’s weighting is recalculated in the NASDAQ 100. The market’s tremendous dependency on Apple is something to take note of.
11) Poor Use of Cash. With over $50 billion in cash on its balance sheet, Apple is not efficiently putting its money to work. With these massive cash levels, Apple could have paid a dividend to shareholders, buy back stock, or even buy a few companies with promising technology or services. Instead, Apple is not rewarding its investors and isn’t improving through acquisitions. Its idle cash may be due to the uncertainty about the market or simply due to Steve Jobs’ arrogance in thinking the company doesn’t need to acquire any smaller companies. Either way, however, Apple isn’t making the best use of its resources.
Apple has been on top for years now. It is the favorite of many funds, individual investors and the media. It has revolutionized the technology and culture of music, mobile phones and computers. And it is expected to continue to shock the world with its capabilities. But expectations may simply be too high. After a 4,600% parabolic rise in stock price, the involvement of almost every investor, extreme expectations as to Apple’s future, a CEO with health issues and potentially-blinding arrogance, a tremendous market cap which could prevent it from growing as quickly as it has, increasing competition, slowing innovation, and declining quality and customer service, Apple’s euphoric peak may be rapidly approaching. With an almost euphoric position in the business and investment world, it may just take a small slip or a failure to exceed expectations to send Apple stock tumbling, triggering a snowball effect that sends institutions and investors running for the exits.
There has been no proof yet of Apple stock price slipping, but it has been stuck near the $320 range since October. Such a sideways move could be a sign of distribution at the top – as smart investors sell their shares to newcomers. Unless Apple can shoot out of this range, it may be setting up for some trouble. The best move for investors would be to wait and see which way it moves, and maybe even take some profits; with all the issues we’ve discussed, there may be too much risk out there.
Disclosure: Chart Prophet Capital is awaiting confirmation before initiating Short positions on AAPL.

Additional disclosure: I have no positions in any stocks mentioned, but may initiate a short position in AAPL over the next 72 hours.