The increased competition for Apple, together with an already-parabolic stock price, extreme expectations, and the loss of Steve Jobs could really hurt Apple in 2012. If Apple and the strong large-cap names can't continue their run, they may drag the stock market down just as they carried it up. [2012: On The Verge Of A Global Recession? (January 4, 2012)]
Apple's (NASDAQ:AAPL) earnings announcement may mark the top for its stock. With soaring expectations about the continued dominance of Apple, investors and much of the consumer technology world could be seriously shocked over the next months as Apple begins to lose its appeal. Apple will no longer be #1 in everything.
I know that sounds intense, or even absurd. But the hurdles in the way of Apple's future may be too great to overcome. Apple is facing huge roadblocks with the loss of its hero Steve Jobs, growing competition on many fronts, slowing global economies, and the peak of herd-mentality in its stock. A number of clues have pointed to a peaking trend, maximum popularity, and extreme expectations on the part of Apple investors and fans. No matter how great Apple does, investors and the rest of the world already expect to hear good things. Apple can no longer massively beat expectations like it used to, it only sets itself up for missed expectations and disappointment.
On one hand, Apple has many strong fundamental reasons to buy it:
- Consistently beats estimates
- Strong product line
- Plenty of cash
- Appealing valuations
On the other hand, however, Apple has a growing number of risks that threaten to derail its success:
- Steep and unsustainable rise in stock price
- Massive market cap. Recently breaching the $400 billion milestone, Apple's size could turn out to be its own enemy. It's hard to grow a company that's already a mammoth. Companies that reach these stratospheric heights usually can't stay up there for long -- think Microsoft (NASDAQ:MSFT). Reaching the $400 billion mark could also invite some selling pressure.
- Technical divergences (slowing momentum). While Apple's stock has continued to rise to all-time highs, the momentum behind the up moves has been declining. Investors seem to be slowing down their relentless pace. As momentum slows, the chances of a big negative shock are greatly increased. Since investor enthusiasm is showing signs of a slowdown, Apple has a greater chance of disappointing.
- Tech IPOs have been weak. The continued weakness in the hot IPOs of 2010-2011: Groupon (NASDAQ:GRPN), LinkedIn (LNKD), Pandora (NYSE:P), Zynga (NASDAQ:ZNGA), and others, points to a softening technology space where Apple is king. If other segments of the technology business are slowing or even falling, Apple will be affected. Even if Apple is the strongest, it could still be hit with the slowdown around it.
- World markets' strong overhead risks. With Europe in the midst of a major banking crisis, the Middle East in massive political upheavals, and emerging markets at the peak of massive asset bubbles, Apple may be dragged down by the falling stock markets. Since approximately 70-90% of stocks trend together with the overall direction of the market, Apple will most likely be negatively affected if the stock market falls. Since Apple has carried the stock market on the way up, it will likely follow it or even drag it on the way down.
- Massive expectations. Investors and customers expect way too much of Apple. Granted Apple is one of the best companies in the world, perhaps the greatest. But if everyone wants Apple to continuously meet or beat expectations, there will come a time when Apple can't outdo itself anymore. Apple is so near perfect at this point that any slip-up or minor failure could snowball into a major negative shock. If Apple fails to exceed expectations, investors could quickly lose faith.
- Steve Jobs' death and future leadership. The loss of Steve Jobs is a real tragedy. He was a true innovator and leader and brought Apple to where it is today. He did establish a legacy and a roadmap for Apple to follow in his absence. However, the leadership currently at Apple may not be able to meet the success that Jobs and Apple have already achieved. Leadership is still in question, and investors may use that as their scapegoat or target for complaint.
- Growing competition. With Google's (NASDAQ:GOOG) Android recently controlling nearly 50% of the smartphone market in comparison to Apple's ~25%, Apple is facing strong and significant competition. Apple may have a strong hold on the iPod, but it's facing growing competition with its iPad, iPhone, and computers. Apple is no doubt a fast growing company with many future prospects, but it is facing competition that may eat at its profits and potentially derail it from dominance.
Apple's earnings announcement is key to the future direction of Apple stock and the overall stock market. Apple has so much influence on stocks that its continued strength is vital to the stock market and in turn the economy. It seems like the right time is approaching for Apple to miss expectations or at least cause some investor discontent. If Apple upsets in any way, its stock could begin the long road down. Apple may be nearing its peak after a tremendous and historic multi-year rally. Apple blew past earnings estimates, but it will be very hard to do so again. Even if it does, high expectations may already be factored in.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long or short position in AAPL over the next 72 hours.