Apple: A Few Signs Of Trouble

| About: Apple Inc. (AAPL)
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Apple (NASDAQ:AAPL) seems to be in a bit of trouble as far as the sales and prices of its two key products (iPhone and iPad) are concerned. iPhone and iPad both played a significant role in its growth since 2009 (see the table below).


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(Source: Apple's annual report 2011, annual report 2012)

From the table above, it's very clear that these two products are the most important products for the company's growth, and any decline in the performance of these two products can affect the company significantly (in a negative way).

The latest operational data of the company (Q3 FY 2013) clearly indicates that the two of the most prominent products of the company are losing their momentum. The company seems to be not only losing its pricing power but also its sales growth despite the lower prices (see the table below).


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(Source: Apple's quarterly report Q3 FY 13)

Declining pricing power:

The company is slowly but consistently losing its pricing power, iPhone and iPad both are facing consistent decline in its prices and in Q3 FY 2013, they hit their all-time low (see the chart below).

  1. iPhone sold for an average of $581 (8% decline since FY 2010).
  2. iPad sold for an average of $436 (34.5% decline since FY 2010).


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Declining sales:

The company is not only losing its pricing power but also is losing its sales growth, despite the lower prices. Things were Ok till FY 2012, when the lower prices were fueling the higher sales (see the chart below).


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But since the beginning of FY 2013, despite the lower prices, the company is facing a slowdown in its sales growth, in-fact during Q3 FY 2013 one of its high-growth product iPad shows a negative growth of 14%. iPhone shows a positive growth of just 20% in Q3 FY 13 as against 71% in FY 2012 (see the chart below).

Impact on results:


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Its Gross margins as well as the net margins show a steep decline (see the table below).


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Other worries:

1. Declining sales in growing markets:

The company is losing its market share in two of the most promising markets China and rest of the Asia Pacific. In Q3 FY 2013, the sales in these two markets decline by about 14% in China and 18% in rest of Asia Pacific.

2. Not a temporary decline in margins:

This decline is not a temporary as mentioned in the company's quarterly report (Q3 FY 2013; page 30):

"The Company expects its gross margin percentage to be lower in 2013 than experienced in 2012, and the Company anticipates gross margin to be between 36% and 37% during the fourth quarter of 2013. The lower gross margin expected in 2013 is largely due to anticipation of a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated component cost and other cost increases."

3. Declining products, sales can also hurt the iTunes, software and services, and accessories segments.

Conclusion:

The world's most valued company is currently reeling under all sorts of troubles:

  • Rising costs.
  • Declining product prices.
  • Declining growth rate.
  • Two of its most prominent products are losing their growth momentum.
  • Declining sales in the export markets and rising competition in the domestic market.

For the last few years, the company shows an exceptional growth due to the success of iPhone and iPad. Now with the slowdown in the growth of both the products the company may lose its growth momentum in times to come.

Until the company gets back its growth momentum either through introduction of high-growth products or through acquisitions (the company holds the huge amount of cash and cash equivalents to consider the acquisitions), its shares may not be able to show the same consistent growth as they have shown in last few years. Its share price has already fallen by about 24% in the last one year (see the chart below), and may go down further if the company reports the same kind of lackluster results in coming quarters.

AAPL Chart
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The chart below shows the company's performance since the last five years:

AAPL Chart
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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