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Bad Apple -- Likely Less Than Appealing Earnings

|About: Apple Inc. (AAPL), Includes: AAPL

AAPL Apple, Inc. has been the proverbial bad apple and is likely to report lackluster and unappealing earnings later this month. Apple failed to have a robust roll out of the iPhone 5, polluted its own "ecosystem" through the change of its recharging plug, and apparently is seeking product diversification instead of product innovation. Additionally, Apple has failed to court its shareholders.

Apple left customers waiting and waiting for delivery of the iPhone 5. Apple launched the iPhone 5 in September 2012 but quickly outstripped its inventory, resulting in long waits. A consumer product launch is meant to move as many units of the product as possible. In effect, the seller wishes to peak its sales during the launch when the product is new and almost sells itself; however, Apple launched its product with inadequate inventory to meet the demand. Tim Cook, currently the CEO of Apple, is touted for his logistical acumen but Apple still missed having sufficient inventory when the iPhone 5 was launched. The author questioned whether Apple would have a robust launch of the Apple iPhone 5 due to 28 nm chip restrictions on July 30, 2012 as published here. Apple iPhone 5 did not have a robust launch and suffered from inventory problems as referred to in said article. Apple missed the revenue from these lost sales in Q3, i.e. the additional unrealized sales from no inventory. Apple did not adopt any marketing or offer any meaningful explanation as to the wait. As holiday sales are being reported, the 2012 holiday season appears to have lagged in retail sales. Apple will unlikely have made up sales missed in the Q3 launch during the Q4 holiday season and moreover will unlikely be able to count on the usual boost in sales during the holiday season. Apple does not launch many products thus it must flawlessly execute and capitalize on its launches. By way of further example, Apple had problems with its mapping function on the iPhone 5. Tim Cook CEO of Apple stated "While we're improving [Apple] Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps by going to their websites and creating an icon on your home screen to their web app." Apple failed at launch with Apple Maps and instead referred you to its competitor, Google. Due to this flawed rollout, Apple likely left money on the table.

As of today, Apple is reported as reducing or already having reduced its parts orders due to low demand as reported here. Again, Apple missed the window for its launch of the iPhone 5 and has not sold as many units as a result. Apple is looking at a less than flawless roll-out of a consumer product which failed to sell as many units as projected as evidenced by its cutting its parts orders for the iPhone 5. If the low demand is accurate, then Apple is likely to report lackluster sales which generally equates to lower profit as well.

Apple changed its iPhone charging plug with the launch of the iPhone 5. Better stated, Apple engaged in planned obsolescence, antiquating and setting a horizon on its older products by changing the charging plug. Apple used to be geek chic by producing the coolest must have gadgets. Customers were glad to put up with slow product roll- outs, prices, and waiting (often in lines for the rollout) for Apple products. Apple played upon this geek chic, an inclusiveness born of its products and style. Apple created an Apple ecosystem in which you could take care of audio, visual, and computing needs through Apple devices that got along well together. Apple was perceived to be "for the people" and the people dug it. When Apple converted its plug, it polluted its ecosystem and lost its panache and style. Apple is no longer geek chic. Instead, Apple is a seller of goods and services that has designed a new product that is incompatible with its previous products. Consequently, the people who have older models of Apple gadgets must upgrade and buy more Apple products to remain in the Apple ecosystem. Stated simply, Apple has caused its consumers to lose faith in it. As to earnings, you may very well see people not automatically upgrading and buying new Apple products. Once loyal Apple consumers may choose something else, which may very well mean lower earnings, not just for this reporting period, but likely going forward for some time. Consumer loyalty is earned not bought.

Apple used to be innovative. However, you can't buy vision and Steve Jobs had vision. Apple was geek chic because it got it. Apple produced the iPod and you wondered how you lived without it. The initial iPhone was spectacular. Instead of innovation, Apple is reported by the Wall Street Journal to be engaging in product diversification, possibly planning on selling a cheaper iPhone. Product diversification is not product innovation and in the past Apple has maintained its price points and impressive profits mainly through innovation, not diversification. As of last week, Apple denied the reports in the Shanghai Evening News by saying cheap iPhones would not be the future for Apple. (citation is Mandarin but online translators due a more than passable job of translating). As reported 10 January 2013, the Shanghai Evening News has revised its article by stating that Apple would provide the best products and not blindly pursue market share. This statement does not appear to foreclose the production of an iPhone5 or other version at a lower price point. When the venerable Wall Street Journal reported and then revised its story about a cheaper iPhone 5 being released, then either Apple and/or the press lacked clarity in their communications. Apple is not clearing up any confusion instead stating that it would not discuss future products.

Interestingly, Apple has not engaged in any stock buyback programs. Apple did provide a regular dividend. By comparison, Air Methods Corp. AIRM provided a special dividend in the amount of $7.00/share while trading at $36.0966/share - high for the day. Air Methods undertook a new loan facility to its existing credit facility to fund this special dividend in part. Air Methods then declared a 3:1 stock split on December 31, 2012 and its shares have appreciated in price since the split. Apple has chosen not to court its shareholders in this manner despite an impressive war chest, trading at a higher per share value and with more cash reserves than Air Methods.

Not to be overlooked, Apple is involved in high profile intellectual property litigation and other disputes throughout the world. The impact or lack thereof on earnings of these IP litigation costs are impossible to predict.

Apple should create and innovate as in the past but at this time appears to have lost its way. Lackluster earnings are likely. Bad Apple.

Disclosure: I am long AIRM. 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.

Additional disclosure: I have no position in AAPL, and no plans to initiate a position within the next 72 hours.