Seeking Alpha
Profile| Send Message|
( followers)  

Apple Inc. (NASDAQ:AAPL) is definitely one of the best performing stocks of the so-called "lost decade." The company is best-in-class, a market leader, has a strong balance sheet, attractive earnings and dividend yield, and has posted phenomenal growth in all its business segments around the world. Nonetheless, Apple's business has risks inherent with its stellar growth and success.

Global Economy

Apple's operations and bottom line depend to a great extent on global economic conditions, as consumers and businesses may postpone spending as a result of dismal unemployment rates, tighter credit, or decline in net worth, which can negatively impact demand for Apple products and services. In addition, in the event of another banking crisis and financial mayhem, partners and suppliers' ability to access credit for development and manufacturing may lead to product delays, or obsolete inventory.

Competition

The technology sector is naturally highly competitive and subject to rapid technological changes. If management is unable to execute and compete efficiently, your returns as an investor could be materially adversely affected. Moreover, there is constant pricing pressure as competitors slash their prices in attempt to attract budget conscious consumers.

For example, Amazon's (NASDAQ:AMZN) new Kindle Fire poses a risk for Apple's tablets business because of the lower price points, which can lure price sensitive consumers away from Apple's higher margin products. If Apple's management does not continuously and accurately introduce innovative new products into the marketplace its astronomical success to date could be in peril. Another fierce competitor is Microsoft's (NASDAQ:MSFT) Windows as competitors selling personal computers with the Windows operating system have cut their prices too.

Obsolete Assets

Due to the rapid and unpredictable taste in consumer demand, Apple may be forced to write-down obsolete inventory. Most importantly, management must keep inventory levels in line with anticipated product demand from the market to avoid future impairments and write-downs. Since the sector is volatile and constantly changing, Apple makes projections about future demand for its products and services for periods up to five months, which can lead to inaccurate inventory levels to meet shifts in customer demand.

Third Parties

In order to incur lower operating costs, significant manufacturing in Apple products is performed outside the U.S., specifically in Asia. Also, transportation and logistics management have also been outsourced to third parties. While this strategy yields a higher bottom line, it also reduces Apple's control over production and distribution. Other critical components are relied upon single suppliers or manufacturers in other geographic regions. Should the facilities be disrupted for any reason, the dependency on single partners can affect operating results.

Intellectual Property

Many Apple products include third-party intellectual property that requires licenses from those third parties. If Apple is unable to renew these licenses, it risks the loss of revenue due to modifications in the products and services it offers, which may not meet consumer demand. As has been seen, technology companies (e.g. Samsung vs. Apple) frequently enter into litigation based on intellectual property violations. This legal process is known to be lengthy and costly.

As an investor who desires to earn a healthy return, it is imperative that you perform your necessary due diligence and analyze each company's core business and operational risks prior to any investment decision to be successful long term.

Source: 5 Apple Risks Revealed