Is Apple in trouble?

February 5, 2013
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What a difference a month makes!

After a troubling earnings call on January 23, shares of Apple have dropped steadily. A recent rebound is promising, but will they return to form any time soon? Does this downturn indicate that Android is a real threat to Apple and iOS? We’ll take a look at the recent events, and consider how Android may have finally started putting nails in the Apple coffin.

The earnings call

On January 23, a strange thing happened. For the second time in a year, Apple failed to meet its earnings expectations. Some analysts are even referring to their Q1 2013 profit as “flat”. Apple has always been relied upon to pace the tech market, or at least outperform its counterparts. With this earnings call, Apple has lost nearly $50 billion in market value. The stock has fallen from $701.95 per share with a volume of 3.13 million on September 18, 2012 to $453.62 per share as I write this on February 1, with a volume of 20.5 million.

This represents a loss in market capital of around $50 billion. A sizable sum, but also one that hardly fazes the tech giant. We’re wise to keep in mind that this $50 billion is the combined market value of Dell, Nokia, and BlackBerry. To this, Apple CEO Tim Cook seemed relatively unconcerned, saying:

“The most important thing to Apple is to make the best products in the world that enrich customers’ lives. That’s our high order bit. That means that we aren’t interested in revenue for revenue’s sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that’s not what we’re here for. We want to make only the best products.”

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What’s next?

Tim Cook also pointed out a number of things “in the pipeline”, but refused to elaborate. With a completely new mobile product lineup in 2012, one would expect its earnings to be through the roof. As rabid as Apple fans are and with the history Apple has of selling iPhones, it was a fair bet it would make its earnings. New devices, new connection port, and revamped iOS (iOS 6) suggest Apple should see a lot of users flipping older devices for new ones.

Even though they sold 18 million more iPhones and iPads over last year, it wasn’t enough. First, Apple has a propensity to release an iPhone, only to launch an “update” labelled an “S” device a year later. Many users will wait for the new iPhone 5S rather than jump on board straight away. There is also rumbling of a low-end iPhone being targeted at the Asian market, which should cause some demand here in the U.S. too.

Connectivity

Apple also changed the connection port from the tried-and-true 30-pin connector to a Lightning connector. While this was necessary moving forward, it does put some users off the updated hardware. Changing one thing for Apple causes a ripple effect throughout the entire line, so users are keen to wait until they can reasonably afford all new stuff. A 30-pin to Lightning dongle was offered, but that’s just another cord to keep track of. The $10 price tag was also mildly insulting to many users.

TV

Apple has not confirmed its TV set yet, which is expected to be a game changer, and we’re sure it will be fantastic. The TV market, however, is declining. Apple doesn’t do anything part-way, so we know it will be stellar unit… with a hefty price tag. It will appeal to the hardcore Apple user who has a few grand to spend on a TV, but overall the device isn’t expected to perform well. A premium TV if you can afford it, but top-dollar tech items are a dying breed.

Apple Inc

Winners and losers

Apple stock is tied into quite a few funds, and mostly hedge funds. With 1,948 institutional holders, 65% of Apple stock is diversified across a broad spectrum. In examining the activity of some of these investors, many of the larger firms have dumped quite a bit of Apple stock and one notable overseas account has relinquished all Apple stock. This is the broadest holder spectrum of any other stock.

With the holdings spread so thin, this lends itself to a mob mentality. When larger firms start unloading stock, it’s a big blow to the market value. Smaller firms follow suit, and the tumble is in effect. There will always be differing opinions on the stock with a large company like Apple. Some will pick up stock at the current discounted price, while others will wait it out and see just what the market is going to do before making a decision.

Bonds

Apple is tied closely to many hedge funds and slow-growth retirement accounts. Apple is considered a conservative stock to keep in your portfolio, a near foolproof investment. When a hedge fund manager decides to relinquish Apple stock, it has to do with the overall security of his investments. As security is a primary concern in today’s market, the attention turns to the bond market. Apple may be one company, but it is usually a large part of a fund, and any volatility can spell disaster for the smaller guys. Bonds are slower growth, but a much safer bet.

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The Android issue

Until Ice Cream Sandwich, Android was nowhere near as user-friendly as iOS. Much of Apple’s income is tied into the direct sales of mobile devices, so its mobile OS had to be great. It was, and is, but Android is now considered on par with iOS for many. It seems Google has effectively beaten Apple at its own game.

In September of 2012, precursors to the events on January 23 may have been set in motion. With Jelly Bean on the horizon, Google stock was even with Apple’s, and even began to outperform Apple. Up to that point, the two companies had flip-flopped for stock value, with Apple usually seeing the slight edge. They also experienced the same trends, an indication they were equally pacing the tech sector.

Once Google convincingly overtook Apple for stock value, those trends began to reverse. Around December of 2012, Google would begin to see the market react very differently. Where the two giants once walked the same path, they were now juxtaposed. If Google was up, Apple was down. It indicates that investors were beginning to see Google stock as solidly as Apple’s. Were they ditching Apple for Google? It seemed so.

Perception

While the lowly consumer may seem like a far-off concern for investors, the market is driven by users. If users are happy with a product, it sells. The last two iterations of Android were a leap forward in terms of the user experience. It was eye-opening for the market, and users began to pay attention. With Android’s growing market share, this OS could no longer be dismissed.

Another factor is fragmentation, and the rise of higher-end Android devices that can operate these great new OSs is a boon for Android. Apple’s iPhone is essentially one device running one OS, so the fragmentation is much lower. The company controls the entire process, where Android is open source. As Android grows, device manufacturers push each other to create amazing devices. This rise in quality devices means more Android users, as the new breed now outperforms iPhones. The fragmentation gap narrows every day, and new iterations are adopted rapidly compared to past releases.

Control

While Android is free, and perhaps not considered “profitable,” the platform has some necessary restrictions. Google keeps an eye on partners via the Open Handset Alliance, and goes so far as to exclude them for violating the terms if need be. A mobile device is also a gateway to the related marketplace and a huge market share means more Play Store dollars. The Play Store is expected to outperform the App Store by the end of 2013, perhaps a more accurate sign of Android dominance.

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Confidence

The heart of this matter is investor confidence. An out-of-left-field bad earnings call is not the root cause of this recent turmoil, but may be the last straw for many. Apple has had some recent issues that are out of character, and may hint at larger issues.

First is the Apple Maps fiasco. Apple had a good thing going with Google Maps, as is evident by the surge of downloads the first weekend it returned to the App Store. Apple boldly went its own way with a proprietary maps app, and it was a disaster. It was a rare miscue by Apple, but a very deep kink in the armor. The subsequent apology left many wondering just what the issues were in Cupertino.

The recent management issues have been both notable and curious. We all know people get hired and fired every day, but the shifting at the top of the food chain is suspect. It hints at poor leadership and calls Tim Cook into question. Tim Cook can never be Steve Jobs, we all know that, but these issues are still surprising. The management movement coupled with a re-alignment points more directly to a leadership problem than anything else. Tim Cook took over from Jobs directly. He inherited Steve’s system, and there were none of these issues before, which calls his leadership capability into question.

All things considered

Apple made some long term investments during Q4 2012, and had some supply chain issues. It began switching to green energy for all data centers, which is a huge undertaking and quite expensive. This will yield along term gain, but is a sizable short-term investment. Its supply chain issues centered around the Mac line of computers, which is the biggest non-mobile device segment. This led Apple to re-commit to making computers domestically. Couple those with ongoing litigation, and an unusual amount was spent to counteract an unusual amount gained.

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Conclusion

Apple will always have a place in the market because it has a very loyal fan base. Even though the recent earnings call is troubling for Apple, the issue is how it responds. If it continues to walk the path it currently does, we may see further valuation issues with the stock. Many investors are refusing to purchase Apple stock, a sign the market may not be as enamored with the company as it was before. Apple will have to do some things to be part of the market, whereas in the past it was quite the opposite. Google and Android have set the pace for the mobile technology landscape. Like its stock, Apple is now a position of playing catch-up.

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