Apple Inc. (AAPL): The Key Problem Is Margin Erosion

Rationale

Apple’s margins are dropping because of competition from phones running Google Inc (NASDAQ:GOOG)’s Android, which is forcing prices down with cheaper smartphones and tablets that are as good as the iPhone and iPad, if not better. Canalys reports that in Q4 2012, Android powered 69.2% of global smartphone shipments, while Apple was reduced to 22.1%. Google Inc (NASDAQ:GOOG) definitely appears to be in the lead here; their charge is led by Samsung, whose Galaxy S series smartphones have been a huge hit.

In the USA, Kantar research for the first quarter of 2013 shows Apple’s iOS at 43.7% share, down 0.9 percentage points from a year earlier, and Android at 49.3%, up 1.4 points. Even Microsoft Corporation (NASDAQ:MSFT) and its snazzy new Windows Phone 8 operating system has increased its market share from 3.7% to 5.6%. Microsoft Corporation (NASDAQ:MSFT) has been losing badly in the smartphone revolution, but its latest entries, most notably the new Lumia series phones by Nokia have seen reasonable success.

Smartphones will follow the PC and the standard cell phone into commoditization. All the products will be perceived as virtually equal, so consumers will buy based solely on price, forcing OEMs to cut margins in order to maintain sales.

Innovation is dead at Apple

On top of all this, some argue, Apple has lost its captain and is drifting aimlessly. People claim that the iPhone 5 was no significant improvement over the 4S, and the new map system was a complete failure. Nothing new has come out of Cupertino, they say — no next great thing. Steve Jobs is gone, and these critics believe CEO Cook will never be able to create a new revolutionary product.

Ultimately, the following scenario is inevitable. Margins will continue to contract. Revenues will fall as Apple’s market share continues to shrink. This is the end of Apple’s overpriced world. Soon the share price will head down again, following Apple’s earnings.

These are the arguments of the Apple detractors. For now, it seems they may be right. The current stock price seems to bear them out.

The article Understanding Apple: A Long-Term Decline? originally appeared on Fool.com and is written by Jaan Seunnasepp.

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