Apple (AAPL) is the undisputed leader in the smartphone and tablet market. But its ability to maintain that dominance is being threatened on several fronts. While Apple might be a good short term investment, the mounting threats and ever increasing competition make it a bad long term investment.
Threats to Apple
The first threat is Apple's incredible profitability. While this might seem counterintuitive, the market has come to expect Apple to have phenomenal earnings. If this begins to diminish, the market will react negatively. We are already beginning to witness this. When Apple's earnings announcement several weeks ago did not live up to investors' expectations, the stock price suffered, even though the earnings were still outstanding.
Apple has been so unbelievably profitable over the past several years that it seems improbable that such a trend could continue to outperform investors' expectations. Especially as competitors are beginning to realize that perhaps the best way to compete with Apple is to sell a comparable product significantly cheaper. Amazon (AMZN) currently competes with Apple in the tablet market by selling its tablets with minimal profit margins, expecting to make money on the add-ons people purchase. This has placed their products $200 or so cheaper than Apple's tablets. There are rumors that Amazon will be moving into the smartphone market. If true, this could be a serious blow to Apple.
The second danger lies in the numerous legal battles Apple has been a part of over the last few months. With the high-profile patent case here in the US between Apple and Samsung (SSNLF.PK), many people forgot the fact that similar cases were taking place in South Korea and Japan. While Apple won the case in the US, receiving over $1 billion from Samsung, it lost both cases overseas. What affect this will have on Apple's overseas market share is yet to be seen. However, it does prove that Apple is not impregnable to the ever mounting competition.
The third danger is therefore market share. Can Apple maintain its dominant market share? Both Samsung and Nokia have new products on the market or entering the market shortly. Both of these products should take a chunk out of Apple's market share. In China, (what could become the largest smartphone market in the world) Apple has lost almost 50% of its market share due to competition from Samsung and various Chinese companies. Likewise in Europe, Apple has witnessed minimal growth in major countries such as France, Germany, Greece, and Italy.
The fourth and final threat is that Apple will somehow lose its monopoly on the "cool" factor. This is perhaps the most worrisome issue for Apple. The danger is not that Apple will no longer be cool, but that competitors will have smartphones and tablets that are equally cool. We are witnessing the beginning of this now. Samsung's new Galaxy S III has near-field-communication or NFC technology giving it all kinds of new features such as tap- to-share and TecTiles. TecTiles are essentially programmable stickers that can be placed around your home or office that cause the phone to do certain things when it is placed on the sticker. They can be programmed to automatically do things like pull up an app, send a Facebook message, set an alarm, etc.
Not wanting to be left behind, Microsoft (MSFT) and Nokia (NOK) recently announced the new Nokia Lumia 920. Perhaps the "coolest" element of this phone is its wireless charging capability, which allows someone to merely set the phone down on a special pad and it will re-charge. According to CNET, Nokia has signed deals with several companies, such as Virgin Atlantic and Coffee Bean and Tea Leaf, to install wireless charging pads in various public locations.
These four major threats seem to indicate that Apple is losing its dominance. Being long on Apple for the last couple years would have been a great investment, but I think that era is coming to an end. Hold Apple in the short term while it gets a boost from its iPhone 5 announcement. However, for those with a long term investment strategy, Apple is no longer the place to be.
Apple gets the last laugh
Apple certainly recognizes its precarious position. All of its competitors have had a chance to make their announcements over the past few weeks and wow the crowd. It is now Apple's turn. For all the announcements Apple has had to endure lately, it knows that the announcement everyone has been most anticipating is the iPhone 5 announcement. Apple's one chance of maintaining its status as the standard by which all other smartphones are measured is the iPhone 5. If it can stay a step ahead of the competition, Apple should be able to maintain its profitability and grow its market share for at least another year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.