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Why Apple Makes Me Nervous

|Includes:Apple Inc. (AAPL)

When I bought my first iPad it was after refunding my net book because I had a practical reason for it. Since the iPad was gaining so much traction it would only make sense for me to learn how to develop for it. I soon found myself using it an exceptionally large amount of time, more then I would of expected. Despite all the jokes and parody that went into the iPad just being an oversized iPod Touch, Steve Jobs again created a completely new space in digital hardware. So it might seem odd that having positive experiences with Apple (NASDAQ:AAPL) products that I would be skeptical of Apple's future, but I believe there are some good reasons to be skeptical. In this article I will talk about what would make me bullish about Apple and what series of events would make me bearish.

The Jobs Concern
Ever since Steve Jobs's passing there have been questions about thefuture of Apple. You have critics arguing that Apple isn't open, or that Apple is better designed, and Apple is over priced. However, investors should ignore almost all of that because the market decides who is right about all of those issues. The concern for Apple investors should revolve around management and how they will manage the brand, their most valuable asset, and how they will maintain an aura of innovation.

It's All in The Design
In Steve Job's biography it outlined how Jobs realized computers should look more like kitchen appliances than industrial machines. He recognized that rounded corners were used every where and applied it both the hardware and software. Apple constantly pushed the envelope when it came to design. When the original iMac came it out, it was considered awesome, but they soon realized that the design was getting dated and continually updated it until we ultimately got the sleek aluminum and glass design we have today.

Apple will soon have a design problem, if it hasn't already started, with their iOS. The Apple iOS is becoming quaint, and this is a serious issue. Simply put, people get bored. With most phone providers offering phone upgrades every 2-4 years this gives users ample opportunity to try something "new" and if the Apple iOS doesn't get a face lift, this could potentially affect their retention rates.

If Apple changes their iOS design for the better, this would make me bullish. If they leave it the same, or heaven forbid, make it worse this would make me bearish.

Apple Products vs Steve Job's Products
Can Apple deliver innovative products without Jobs? I don't know, because I haven't seen a new Apple product yet. The only Apple product I have seen is the iPad mini which wasn't so much an innovation as a trend following copy cat, though the commercials will say differently. Their other major new innovation was Maps, that on top of all the problems it had, brought nothing truly innovative to the table. Apple Maps was simply a product designed to fulfill Steve Jobs's "Themornuclear War" on Google (NASDAQ:GOOG), and it failed.

Jobs left the company with a very strong product line but it's anyone's guess if regular, some what minor, revisions to it will sustain the company into the future. Will Apple be able to release another cash cow product like the iPhone with out Jobs? I am not sure, but what I am paying close attention to is if, or when, they release products that fall outside of the product line Jobs left with them.

Apple's Horsemen
If Apple continues to grow it is based on one thing: innovation. If management can continue to push innovation this will allow Apple to continue to maintain its throne as one of the biggest technology companies in the world. However, if it can't, there are a couple of things that should be watched for that could signal end of days for Apple:

1. Management Proves Incompetence
A series of events, supported by a strong push down in the market, proves management has lost its capability. Management has already made some foolish mistakes such as the green tech certification rejection and reversal.

2. Apple loses a lot on an "innovative" product
This will be a very strong indicator that Apple is on the decline. However this innovative product needs to make a huge dent not only in their reputation, but also their wallet. While Apple Maps might be considered by some to be a flop, I don't believe it has the necessary financial implications to fulfill this second horseman.

3. Management makes a business model Shift to try and recoup losses
Shifting to an innovative business model could actually save them, if they got to this point, but what would be disastrous is if they tried to emulate someone else's model. For instance if Apple tried to switch to an operating system licensing business model similar to Google's or Microsoft's.

Final Fallout
Once the above three occur this will be followed by a series of predictable events. They will start losing significant amounts of money and start burning through their reserve. In order to stop the blood loss this will be followed by progressively larger lay offs. Meanwhile they will be preaching about this next great thing that will change everything.

Finally, the biggest mistake of all: Management, in order to try and become profitable and make the share holders happy, will make a series of very bad investment decisions in stocks or otherwise which will result in significant losses. They might also move their large amount of money around in order to try and avoid losses by inflation, this will result in more losses when the economy goes through a natural recession putting a further weight on them.

Conclusion
70% of Apple's revenue comes from iPhone, a market they have beenlosing to Android, some of their other revenue streams are directly linked with this mobile infrastructure. This, of course, could be all wrong. I am not a psychic. They could continue to release innovative products. This was Jobs's dream for Apple after all. Also, keep in mind that if these things happen there is no solid time frame for them. It could be 5 years or 20 years. If Apple diversifies into other industries it is even more unlikely they will go away. That said, we should always be on the look out for history repeating itself because if we see the below image again, there will be no Steve Jobs safety net.


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

Stocks: AAPL