Apple storm clouds begin to gather

Could Apple become the world's first company valued at $1 trillion U.S.? After a runup by investors that's seen its market value grow by over 60 per cent this year alone, speculators are already drooling over the prospect.

They may want to ease back on their predictions. With storm clouds — including a just-announced antitrust lawsuit that accuses Apple and a number of other publishers of collusion on ebook prices — already gathering on the horizon, there's no guarantee that the company will be able to sustain its unprecedented growth.

Counting the sky-high numbers

For investors watching the charts, the numbers make it easy to get caught up in the hype. The iPhone and iPad vendor is already the most valuable company in the world — after a seesaw battle with Exxon-Mobil, it finally surpassed the energy giant for good last autumn. Thanks to huge holiday sales and a record-setting third-generation iPad launch last month, Apple continues to grow at a torrid pace.

Its market capitalization blew through $500 billion on Feb. 29^th — a level matched by only five other companies in history — and has since topped $600 billion. It's threatening to beat the all-time market cap record set by its nemesis Microsoft in 1999. Even when that $619 billion figure is adjusted for inflation, to $846 billion, some analysts say it's only a matter of time before Apple tops them all on any scale. Some have even set $1 trillion valuation targets by 2013 or 2014.

If this all sounds like dot-com-bubble-mania, you're not far off. Sure, Apple's fundamentals are infinitely stronger than the eyeballs-over-revenue hysteria that passed for business planning in the late 1990s. The house that Steve Jobs built has a stable of industry-dominant products, a platform-centric roadmap that sets it apart from competitors solely focused on hardware, and a brand that long ago leapfrogged beyond the tech space into the mainstream consumer market.

Forever doesn't exist
Still, as much as investors want to believe the rocket ride will last forever, reality dictates otherwise. Apple's good news parade isn't about to end tomorrow: Its updated iPhone 5 and hotly anticipated television offering are expected to continue to drive its upward momentum well into 2013, and its plans to start paying dividends this summer will keep its shares white-hot for the foreseeable future. But the company faces a number of significant challenges that could ultimately curb — or even reverse — its growth:

Antitrust allegations
The U.S. Department of Justice sued Apple and a number of publishers, including Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster, this week over allegations of ebook price fixing. This isn't the first time Apple has found itself in antitrust-related hot water — the company came under federal scrutiny in 2010 after complaints it unfairly restricted Flash developers from converting their apps for use on iPhones — but as the company moves more deeply into mass consumer markets, it will become increasingly exposed in this manner.

Supply chain hiccups
Beyond an industrial design ethic that consistently puts Apple's products in a league of their own, the more significant growth driver has been the company's ability to build and maintain a uniquely scalable and efficient supply chain. Growing questions over factory conditions in China, however, could become a drag on the bottom line as formerly invisible plants come under increasing public scrutiny. Foxconn's recent announcement of improved wages and working conditions for workers suggests margins could be squeezed going forward. Apple is hardly the only global vendor at risk, but it has the most to lose given its differential reliance on a precisely balanced supply chain for continued profit growth.

Carrier resistance
It's no secret that Apple has used the popularity of its iPhone to squeeze carriers desperate to carry the most sought-after devices. Sprint, for example, last October committed to buying $20 billion worth of iPhones over the next four years. Apple's ability to shift high subsidy costs onto carriers' backs, however, is expected to wane as increasingly squeezed carriers push back against Apple's strong-arm tactics.

Innovations run out of steam
With iPhones and iPads selling like hotcakes, it's hard to imagine the Apple juggernaut ever slowing down. But it could if the company settles into a cycle of routine feature updates to its existing products instead of creating entirely new categories around groundbreaking new products. Apple's rumoured iTV television offering could be the next category-builder, but it'll need more if it hopes to sustain the good times. As competitors sharpen their knives — Samsung, for one, has emerged as a major global competitor, and is gearing up to launch storefronts in Canada — Apple could be caught short if it doesn't double down on innovation.

Apple's share price continues to trade at relatively low multiples, which suggests continued room for growth. But as the fuel for that growth comes under greater competitive, regulatory and fiscal pressure, the once wide-open playing field now threatens to slow Apple's momentum considerably. Even if you've already bet the mortgage on a trillion-dollar market cap, don't bet that it'll stay there.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca