Apple (AAPL) advanced strongly on Friday, rising 1.7% compared to just a 0.3% increase in the Nasdaq Composite. After an almost 8% decline in the previous two trading days, AAPL was helped by a reiteration of a buy rating by UBS analyst Steve Millunovich. At Friday's close, AAPL was down 22% from it all-time high of 702.10 achieved on September 19.
There are many possible causes of recent decline in Apple's stock; most of these reasons probably stem from a disappointing quarterly report and lowered guidance. However, investors are beginning to wonder if Apple is still the leading innovator of the mobile technology market.
Each iteration of the iPhone has truly changed the cell phone user experience - that is all except for the iPhone 5. The first iPhone introduced the idea that a phone can provide a full music/video media experience, function as a wholesome internet browser, and offer the necessities of a business device - email and phone. The second iPhone (3G) brought necessary competitive updates of GPS and 3G data to the device, but changed the game entirely by offering an "app store." The iPhone 3GS added new features that redefined the capabilities of a cellphone camera while adding new and faster hardware. The iPhone 4 set a new standard for screen resolution and camera phone quality. Even the iPhone 4S was a serious innovator by providing intuitive voice communication with the Apple software known as Siri. The iPhone 5 however was unlike all iPhones before it. The iPhone 5 was the first iPhone that did not cause a paradigm shift in the smartphone market.
The only somewhat unique feature that the iPhone 5 possesses is a coupon amalgamation application known as "Passbook" that no competing OS is racing to compete against. The newest iPhone was not an innovation, it was an update. The enhancements included 4G LTE, larger screen size, and built in turn-by-turn navigation. Each of these three primary updates stirred minor excitement at best, and the phone was mocked by Samsung (SSNLF.PK) in a frequently aired commercial. 4G LTE was starting to become a new standard during the time between the release of the iPhone 4 and 4S. The larger screen size announced at Apple's keynote presentation was continually reinforced to the audience as the only appropriate screen size due to the length of the human thumb - something LeBron James contradicts in his new Samsung Galaxy Note II commercial. The Apple Maps quagmire was probably the company's most obvious fault with the release of the device - major locations like airports were misplaced and in general, navigation was glitchy. This forced Apple into a rare apology. The iPhone 5 was a dud from an innovation standpoint; more specifically, it wasn't what Apple has been doing for the past five years - setting the standard for smartphones.
More reports continue to come out that seem to indicate Apple indeed has problems. Its share of the tablet market has dropped significantly as new market entrants find success. Its cultist fan base has become less committed to the brand. And the iPad Mini is not competitively priced to attack the 7-8 inch tablet market effectively; it will likely be bought by only hardcore fans. Apple has been good at innovating and inventing. Once a year Apple would surprise every consumer on the planet with a smartphone that could do something no other smartphone could do. This was not the case this year. Google's (GOOG) Android is versatile, for example, its voice technology on par or better than Apple's Siri. This particular blunder with the iPhone 5 might be minor, or it could also mark a turning point.
Consider Research in Motion (RIMM) when it was competing directly with the first and second generation iPhones. RIMM's Blackberry had been the innovator, but very quickly was overtaken by a more versatile and exciting device - the iPhone. Apple could go the way of RIM or it could surprise us all over again. The lesson learned from RIM is that once the leading innovator position is lost, it is hard to regain. While Apple hasn't relinquished its position yet, the competition has certainly caught up and has considerable momentum going forward.
With its recent price correction, AAPL is now selling at just 11.0 times next 12 months consensus EPS estimates - a 14% discount to the S&P 500 P/E multiple. While AAPL appears to offer value, I see significant risk related to potential further losses in its position as leading market innovator. APPL now has formidable competition in all of its major product categories, something that could lead to market share erosion, shrinking profit margins, and ultimately further weakness in its share price.