Yahoo Finance 3 reasons to be skeptical about Apple
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With a market capitalization approaching $800 billion, Apple Inc. (AAPL) has seen runaway success thanks to its high profile iPhone lineup. Other products, including the Apple Watch, Mac and the iPad have contributed to the company’s strong ecosystem, often listed as the reason for Apple’s competitive advantage. However, investors and analysts might be overly optimistic about the stock, forgetting that the tech giant is not immune to key risks that most technology companies face.
Too Much Reliance On The iPhone
Much of Apple’s revenues and profits now come from its flagship products, the iPhone 6 and the high-end iPhone 6 Plus, both launched last September. In the March quarter, the iPhone contributed over 69% of total revenues, making Apple dangerously reliant on just one product.
Earlier this year, Berenberg Bank analyst Adnaan Ahmad wrote, in a research note, that the law of large numbers will soon hit Apple. Mr. Ahmad believes Apple’s massive exposure to the iPhone will lead to its downfall. He describes the company as “over-earning and over-loved.” The analyst isn’t particularly impressed with Apple’s sticky ecosystem and predicts the company could face negative iPhone growth in the coming quarter. Mr. Ahmad has a Sell rating and an $85 price target on Apple. As trading closed on Tuesday, the stock stood at $126.
The above chart shows that the iPhone’s share as a percentage of total revenues has consistently increased, since the product’s introduction in 2007, to more than 55% in FY14. This overdependence on the iPhone means that in the event of a demand peak, Apple’s growth metrics would be undermined. A slowdown in iPhone sales is becoming more of a possibility with intensifying competition as well as market saturation in the high end smartphone sector.
There are a number of competitive threats. In April this year, Samsung rolled out its Galaxy S6 lineup to take on the iPhone 6 and 6 Plus. Data from the International Data Corporation (IDC) suggests Samsung retained its global lead with the highest number of smartphone units shipped, a 24.6% market share in 1QFY15. Apple comes next with an 18.6% market share. The data below shows that Apple has more or less conceded market share to new players and Samsung.
While Samsung could be seen as Apple’s biggest rival, the most significant threat to the iPhone maker comes from China, ironically Apple’s focus market. Chinese technology startup, OnePlus has gained popularity across the globe with its competitive pricing, while Xiaomi is making its own moves into premium smartphones. If the upcoming OnePlus Two handset makes an impact when it launches then Apple could feel the pinch, especially in China, where turmoil in the markets and spending pullbacks could see iPhone sales growth decelerating.
Next to competition, there is market saturation. Pacific Crest, which has a neutral, Sector Weight rating on Apple, believes that market saturation is the biggest risk for the stock. Its thinking is that most people earning $15,000 or more per annum are likely to own an iPhone by 2016. Premium smartphone market saturation means the high margin iPhone 6 Plus could face a hit, risking a drag on the corporation’s margins.
Uncertainty Over Apple Watch
The gleefully anticipated Apple Watch was released on April 24 this year. It was widely expected to outclass rival smartwatches with its apps and attractive features. The smart wearable has disappointed many, who claim it is no different to any other watch that lacks a killer app. Skepticism surrounding the Watch is buoyed up by the fact that Apple, in its last earnings call, refused to discuss Watch sales only stating that demand has been greater than supply.
Pacific Crest’s anecdotal research suggests demand for Apple Watch appears to be declining with component order volume also falling. Slice Intelligence recently published a report claiming that Apple Watch sales have collapsed by 90%, since the product’s launch. Apple Watch numbers will be closely scrutinized by analysts in the third quarter earnings results, due out on July 21.
What About iPad?
Perhaps, Apple’s biggest problem at the moment is the persistent decline in iPad sales. In the last quarter, sales of the device retreated by 29% Year-over-Year (YoY). Its share of total revenues shrunk to 9.4% from 16% in FY14.
Findings contained in a new study by Forrester Research point to a plateau in the overall iPad market. The reason for this, again, can be attributed to market saturation in tablets.
Conclusion
These concerns appear to be reflected in the recent sluggishness in Apple stock, which has traded flat in the last three months. At BidnessEtc, we remain concerned that Apple could become too reliant on continued iPhone volume gains. In the absence of another game changing product, and a weaker upgrade cycle for the iPhone this year, its shares could face some hurdles in the upward trajectory that activist investor Carl Icahn predicted so confidently. After all, it took many ups and downs along the way for Mr. Icahn’s prediction on Netflix to bear fruit. Apple investors should buckle up.
