Apple - Time To Take Profits As It Cedes Computing Market To Google

| About: Apple Inc. (AAPL)

I had recommended buying Apple (NASDAQ:AAPL) stock before the launch of a new products at the end of the year. The reason was that technology stocks generally go up during a product refresh and this has been seen a number of times in the past. The stock has run up by around ~15% as the new iPhone has seen good sales. However, the current products released by Apple are not going to expand the Total Addressable Market (TAM) as I had thought earlier. The company did not release a cheap smartphone, instead came out with 2 premium smartphones - iPhone 5S and iPhone 5C. This is a serious blunder on the part of Apple. The company has left almost the whole of the lower and medium end of the smartphone market to Google (NASDAQ:GOOG), as it does not have a product for this segment. While it may preserve Apple's margins in the short term, it seems a strategic mistake for the long term. I have no clue why they have introduced the iPhone 5C. It is going to cost $730 in China and pretty much in the same range in India as well. This means that the smartphone is meant only for the top income bracket who can easily pay $100 more to buy the iPhone 5S. Why would anybody buy the iPhone 5C completely beats me. There were no other new product launches such as the iWatch, iTV etc. I think that the trade of buying Apple before the product refresh is over and it is time to get out of the stock.

Apple gives up the Computing Market to Google

The fastest growth in the computing market is being seen in the lower end of the smartphone segment in countries like Indonesia, China and India. Most of these customers cannot afford Apple products as it is simply too costly compared to their purchasing power. Google's free Android based smartphones have rapidly filled this category without any major competition. Nokia (NYSE:NOK) - Microsoft (NASDAQ:MSFT) has only recently started to target this segment with the lower end Lumias, while BlackBerry (NASDAQ:BBRY) has gone out of the picture. While Android cannot match the smoothness and sophistication of the iOS operating system, the hardware specifications of equally priced smartphones are way better than iPhone. For example you can buy the Nexus 4 for the same price as the iPhone 4. It was hoped that Apple would introduce a $250-300 smartphone for this segment, which would allow it to take a big piece of the medium to lower end of the market. The iPhone 5C is another premium smartphone with a $100 lower price. I am not sure what market studies Apple did, but I cannot see any market for the iPhone 5C at all. It is a no brainer that Android will dominate the smartphone market (it already has a 75% plus marketshare). I don't see Microsoft being able to dent the Android market in the near future. Even in tablets, Apple's marketshare is declining rapidly as Samsung (OTC:SSNLF), Asustek (OTC:AKCPF), Lenovo (OTCPK:LNVGF) and Amazon (NASDAQ:AMZN) are making big inroads. The PC market was never Apple's forte anyway and the market is declining. Tablets and smartphones form ~80% of the computing market and that is being dominated by Google.

iPhone 5S is also Underwhelming

While the Apple fans are already going crazy over the new iPhone, I could not find any attractive new feature in the iPhone 5S. The only new feature was a fingerprint sensor which does not seem to be too great an attraction. Free iWork applications also won't pull customers, given that the most people use Microsoft Office which is far superior to other productivity software (though Google Docs is rapidly improving). The iPhone 5S only incrementally improves on the iPhone 5 and I think that Apple's declining trend of smartphone market share will not only continue but accelerate.

Apple seems to have lost the Innovation Gene

With technology product cycles accelerating rapidly, companies such as Samsung , Sony (NYSE:SNE) etc. are introducing new flagship products every 3 months. Apple is becoming too slow with its yearlong product cycle. To compound this problem, Apple's new products are nothing more than old wine in a new bottle. All it could come up for its new smartphone was a faster processor and a fingerprint sensor. There is no doubt in my mind that the company has lost its innovation edge over the competition. I think that Samsung, Google, Nokia etc. are much more innovative companies compared to Apple today. Google will soon be launching Google Glass, Samsung and Sony have introduced smart watches and new digital cameras, while Nokia recently introduced both a tablet and phablet. Apple on the other hand has come out with nothing new.

Apple is losing millions of potential iOS and iTunes Customers as well as making Competition stronger

The competition in the smartphone market has become extremely high in the last one year and companies which miss a couple of quarters can get decimated. Apple does not have a product in the fastest growing smartphone segments like the phablet segment. There is no doubt that the iOS is the best smartphone OS, but others are catching up rapidly. It is only a matter of time before Android and probably MSFT catch up with iOS. Also, Android has enabled Asian upstarts like Xiaomi, Micromax etc to become big smartphone players. These companies are attacking the medium end of the smartphone market as well as foreign markets. By not releasing a smartphone product for this segment, Apple is not only losing hundreds of millions of new iOS and iTunes customers but also allowing its competition to become stronger. While Apple may be making a good short term decision in protecting its margins, it is making a big long term mistake in my view.

Apple's Stock Performance and Valuation

Apple's stock has broken out of its $400-450 range as the imminent product releases creates excitement around the stock. I have been waiting for a 20-25% upside move in the stock and that has been pretty much achieved. The valuation of the stock is also crept up and is now trading at 12x forward P/E, which puts it in the same range as the other mega technology stocks such as Microsoft , Intel (NASDAQ:INTC) and Cisco (NASDAQ:CSCO).

AAPL Total Return Price Chart
(Click to enlarge)

AAPL Total Return Price data by YCharts


I have been left disappointed by Apple's decision not to release iPhone Lite as I thought this was the most important product for Apple to stop its marketshare decline. The new iPhone 5S is also underwhelming, while the iPhone 5C makes no sense at all (even the market seems to be proving that). I was heavily criticized by readers when I said that Blackberry was being stupid in pricing the Q10 and Z10 too high. However, I was later proved right as BBRY heavily discounted the Z10 and the company is now fighting to survive. I am not saying that Apple faces a BBRY predicament given Apple's massive size and comfortable cash position. But, even the biggest Apple fan will have to concede that Apple has lost the edge it had under Steve Jobs. The company is being "out-innovated" by other technology companies that are rapidly closing the gap with Apple. I will look at taking my profits on Apple stock as I do not think that the company has much upside left at the current valuation and price.

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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