Why Apple May Miss Upcoming Earning Estimates

Apr.11.12 | About: Apple Inc. (AAPL)

Apple (AAPL) currently weighs about 4% in S&P 500 index and a stellar 20% in the Nasdaq 100 index. Every movement of this 600 pound gorilla is closely watched by investors around the world. If we project the revenue stream based on historical records, Apple's stock seems to be on its way to $900 and to becoming the first $1 trillion company.

Is that going to happen? Apple's dominance may not have as much lasting power, as some analysts believe. There are several major roadblocks that will contribute to Apple's fall back to Earth.

1. Projection of iPad sales

Most of the projections of iPad sales predict that its sales are going to grow by 80% to 100% in 2012. This may not be the case, for three reasons.

  • First, in order to cope with competition from low end products such as Amazon (AMZN)'s Kindle Fire, Apple now keeps iPad 2, the last generation iPad in the product line. iPad 2 is $100 cheaper than the low-end new iPad. As it is almost always true in electronics that an older generation with lower price means lower margin. iPad 2 is likely to cannibalize the new iPad's sales and will hurt the profit margin.
  • Second, based on Internet users' web search volume, people's interests in iPad increased significantly from 2011 to 2012 -- but it didn't increase by 80 or 100%. It was somewhere between 50% and 67%. Even the most pessimistic estimate is higher than that.
  • Third, most of these estimates use iPhone's historical sales growth to estimate iPad's growth in 2012. This isn't necessarily going to happen, as iPhone is in a much more mature category with a lot of existing categorical demand. iPads' sales growth is more likely to take a slower pace than iPhone in early stages.

So, iPads' sales could be as much as a third below the most optimistic estimates.

2. Competitors of iPhone

Apple is in a condition that some people choose not to use iPhone purely for variety seeking reasons, which benefits smaller players like Nokia (NOK), or they simply don't like the iron clad control over iPhone enforced by Apple with iTunes. When iPhone's competitors are getting better and better, Apple hasn't moved that much since the first iPhone. No matter how much this amazing device can do, other devices in the market are almost doing things equally well.

If Apple is the hare, Microsoft (MSFT) is the tortoise. Microsoft is not that innovative, but it is the greatest copy cat in the world. It has perfected the graphic interface of Windows based on Mac OS. It has exceeded Sony's (SNE) Playstation and Nintendo's Wii to become the biggest game console in the U.S. To getting into the mobile OS market, it has introduced the first major Windows phone Lumia 900 by Nokia, which so far appears to be a decent success.

Another piece of news: AT&T has recently started to allow out of contract users to unlock iPhones. This will create a huge secondary market, which will soon compete with Apple's new iPhones. Apple will not get any part of the trading revenue in the secondary market. So, iPhone sales could miss analysts' estimates too.

3. Software vs. hardware

One more point about Apple's future: Apple is a hardware company. It always has been. The problem with Apple's business model is that it uses software to service hardware. Windows kicked Mac OS almost to death by opening up the software to developers. Apple has learned that by baby step this time: It has opened API for developers to write apps for iOS. But the fact is that iOS serves iPhone/iPad only. So Apple has to come up with radically new products quickly, far exceeding its competitors. This business model requires extraordinary visionaries. There is only one Steve Jobs.

Apple has no follow-up innovations to iPhone and iPad. It can make changes to iPhone and iPad for a couple of more years. Then? Can we count on Tim Cook to come up with the next new thing?

Usually the market attempts forward looking a year or two. By the next summer, if we are dealing with iPhone and iPad, without iWhatever on the way, Apple is toasted. Competitors will be close enough, and Apple's margin will be eroded quickly. By 2014 at the latest, Apple may fall. Before that, shareholders should enjoy the bullish run while it lasts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.