Apple (AAPL) has been one of the best performing stocks of the last two years. The stock has gone from $45 to $180 in about a year and a half, which is impressive especially given the size of the company. The nature of the rise was momentum trading at its core; however I must admit that the ascent was also supported by very solid fundamentals. The company has continuously beaten both its top and bottom line by a large margin, while Steve Jobs and his team has brought about some of the most revolutionary products of the last decade to the market.
As an equity investment, however, 
I think that Apple has found itself struggling with multiple headwinds lately and therefore I think the stock will perform poorly, at least relative to the overall market, in the mid-term. I detailed these headwinds below and I am curious to hear back from all of you Apple fans out there. I don’t trade the Apple stock but as a trading story the stock has really struck me as a case study and I continue to follow the news about Apple.
Headwinds
Market Cap Has Gotten Too Large To Expect a Similar Move like the Last Two Years: As of this writing Apple’s market cap is approximately 153 billion. As those of you familiar with the economics know, growth is a marginally decreasing phenomenon, especially percentage growth. In other words it is entirely a different story to go from 35 to 180 billion and 180 to 500 billion in terms of market cap. Think about it this way - Would it make sense that a company which has 5% market share in a sector which is tied to our discretionary spending with less than 10% of our total spending surpasses a company which services some of our largest needs and has much more market share. I mean Apple being a larger company than GE with only 5% market share in the electronics department, I doubt it.
Despite the Innovation in the Products, Product Range Is Not Very Diversified: In the past Apple has made some very good decisions in following the trend and sometimes creating the next big thing. However there still remains a risk tied to the product portfolio. For example, so much of the company’s fate seems to be tied to mobile devices and services. What if mobile is not the next big thing? What if people prefer a much smaller mobile device with only voice capabilities to a large one with a screen and a lot of data tools? Also, recent projections tie a significant amount of projected revenues to the App Store. I doubt that some of the largest gaming software developers like EA (ERTS) would allow non-professional developers to steal market share from them. If consumers really embrace this gaming on the mobile device phenomenon, I think major game developers would be quick to establish their own devices and own App Stores, through a joint venture with another prominent mobile firm.
So Much of Company’s Success Seems to Be Tied to A Single Person – Steve Jobs: I admire Steve Jobs very much for his talent. His marketing, innovation and product design skills are extraordinary to say the least. On the other hand as an investment his sole leadership of the Company, at least as the media and general public perceives it, constitutes great risk for the Company. We all saw how big of an event it was when rumors about Jobs’ health surfaced recently. To make the matters worse, he does have a history of a life-threatening disease which has a high rate of recurrence. If a public announcement about a serious threat to Jobs’ life were to be made I am pretty sure the stock would take at least a 30% hit in a single day, if not more. I am not sure that is the kind of risk you want to carry in your portfolio.
Apple’s Profit Margins are Decreasing As It Aims To Go Mainstream: Back in the day, I don’t know if you remember, Apple used to sell desktops at $2.999 while a comparable PC would cost you somewhere around $1.699 (a 75% premium). Then the iPod became popular and Apple would sell its devices for $399 while comparable device would have cost you $299 (a 50% premium). Now Apple is selling iPhones for $199 while a comparable device will cost you… well $199 (no premium at all). As you can see, as Apple aims its products more and more towards the mainstream its profit margins are falling. It is no fault of Apple that this happens, there are only so much people around who are willing to pay a 50% premium over a similar device just because it looks cooler and is a little more fun to use. Apple is trying to make up for its decreasing margins in the devices department through making use of the greater volume in its iTunes and App Store. However, if a serious attempt is made by Apple’s rivals in targeting its online stores Apple’s profit margins can be under serious trouble. In turn, an earnings miss could make a huge dent in Apple’s stock.
Economic Environment Will Most Likely Decrease Demand For Premium Products: This is mostly connected with the previous headwind. As people get more financially strained, discretionary premium products are the first thing to go. This is not a long time risk as the economic prosperity will return in a couple of years, however for the near future Apple might find it a little hard to achieve its top and bottom line estimates.
Of the five I have highlighted above the market cap argument, I believe, is the most likely headwind to present itself. The reason is, other headwinds might somehow be alleviated by good management and a little luck. However, I can’t think of anyway the stock can find its way around the market cap argument.
Another huge risk is, as I said for many traders the stock is a momentum trade at its core. So far although the stock has started to lag the market people are reluctant to short Apple, because people who have done so in the past got burned real badly. However, if the current market heads higher but Apple stock stays behind momentum traders will be quick to pull out of Apple in search of other trades like financials. Such a move by the momentum traders or an unlucky earnings miss might hit this stock really bad.
As I said I don’t trade Apple stock, however I am fascinated by its story, in the last two years especially, and would like to hear your comments on it. My perspective seems to be that Apple was a great company but it had its day and is in the past. Let’s move on.
Disclosure: None
