The negativity surrounding Apple Inc. (NASDAQ:AAPL) just keeps continuing day after day ever since the company’s stock went downhill from its peak of $705 per share last September. The latest blow was a remark from CNBC’s Jim Cramer, who likened the company to J.C. Penney Company, Inc. (NYSE:JCP).
Cramer said: “Apple is becoming the J.C. Penney of tech. I think that there is a sense that the company is in a tailspin, and it doesn’t seem to matter what they do right now.”
Apple Inc. (NASDAQ:AAPL)’s similarity with J.C. Penney
Bill Ackman of Pershing Square Capital Management, which owns a 17.8% stake in the company, told Reuters that Johnson’s execution “has been something very close to a disaster.” He emphasized that changes in the pricing strategy and merchandise were abrupt and weren’t tested.
Some people are speculating that Ackman might be looking for ways to exit his investment in J.C. Penney because the hedge fund is losing millions of dollars. However, Ackman said that he is sticking with the company. He said:”In fact we’re going the other direction, we’re digging in.”
Analysts suggest Ackman could push the company to sell some of its valuable real estate assets or to go private, which is the best way to exit his position. According to them, some private equity firms are still interested in buying J.C. Penney because of its valuable real estate assets.
J.C. Penney Company, Inc. (NYSE:JCP)’s former CEO, Mike Ullman, is back at the helm of the company. Ackman sits on the board of the department store chain, and according to him, J.C. Penney will restart circulating coupons in newspapers to drive consumer traffic.
What is the similarity between Apple Inc. (NASDAQ:AAPL) and J.C. Penney Company, Inc. (NYSE:JCP)? Apple had been refreshing its iPhone devices, and the tech giant also made a change without testing the outcome. When the company abruptly changed Google Maps for its own mapping application, the result was a disaster. Many users complained because it was giving inaccurate directions. In addition, sales of the iPhone 5 did not meet analysts’ expectations, indicating that Apple needs more than a refreshed iPhone.
Refreshed iPhone
Apple Inc. (NASDAQ:AAPL) products are pressured in many aspects, particularly in terms of pricing. The company is planning to start the production of its refreshed iPhone, and it is still in discussion with its suppliers regarding the manufacturing of a cheaper iPhone. However, the idea of a cheaper phone is still uncertain.
Take note that Apple’s CEO Tim Cook previously pointed out that Apple “wouldn’t do anything that we consider not a great product.”
The tech giant is expected to release the refreshed iPhone this summer. Sources from the company’s supply chain said that the size and design of the device will be similar to its existing line of iPhones. Perhaps this is one of the reasons behind Cramer’s opinion that Apple Inc. (NASDAQ:AAPL)’s next product would be another disappointment, just like its Lisa computer from the 1980s.
Real concerns
In Apple Inc. (NASDAQ:AAPL)’s case, its revenue for the first quarter of fiscal 2012 is not a problem. In fact, the company posted $54.5 billion in revenue, up from revenue of $46.3 billion in the same period a year earlier. Its net profit per diluted share slightly declined from $13.87 in the year ago quarter to $13.81 per share. The company has a large sum of cash on hand at approximately $137.1 billion, and every quarter its available cash is increasing. So, why is the market surrounding Apple with negative perceptions?
The main reason is that analysts and investors alike are becoming increasingly concerned that Apple might not be able to release a new product to maintain its profitability. The iPhone and the iPad are facing strong competition from devices powered by the Android OS, particularly from Samsung’s (NASDAQOTH:SSNLF) Galaxy smartphones and tablets.
Samsung had been very successful in innovating its products and has captured a significant market share in the smartphone industry. The South Korean electronics manufacturer shipped approximately 33 million units of the Samsung Galaxy S3 in the second half of 2012.
The Samsung Galaxy S4 has received positive reviews, an indication that the device will achieve high sales. The device is no doubt a strong competitor because of its features and lower price compared with the iPhone.
According to Jefferies’ analyst Peter Misek, Samsung and Apple Inc. (NASDAQ:AAPL) have equal satisfaction ratings from customers. If there’s no major difference between the high-end Samsung and iPhone, there’s no reason for consumers to pay a higher price.
Based on Jefferies’ global analysis of the smartphone markets, the incremental growth for smartphones is happening in emerging markets where a $350 to $450 iPhone maybe too expensive for consumers. He believed that Apple’s profit from the iPhone may have peaked in 2012.
Goldman Sachs Group, Inc. (Goldman Sachs) removed Apple from its conviction list and lowered the stock’s price target, citing a valuation that is “remarkably depressed” and a recent product cycle that failed to drive its anticipated market share and new user growth.
Three-point solution
ISI Group analyst Brian Marshall said in an interview with CNBC that Apple needs a three-point solution to address investors’ concerns and wash away all the negativity affecting the company’s shares. He recommended that Apple should produce a 5-inch iPhone, a low-cost iPhone, and return cash to investors.
He explained that it’s important for Apple Inc. (NASDAQ:AAPL) to move to a 5-inch display iPhone because of the fact that more people want to purchase high-end smartphones with a larger screen. He noted that the most high-end smartphones featured in the mobile World Congress in Barcelona have larger displays. Apple needs to join the trend to maintain its market share.
A number of analysts were talking about a low-cost iPhone months ago. The analysts have similar views, and think that Apple needs to sell a cheaper iPhone to capture market share in the emerging markets where consumers are willing to pay $200 or less for a smartphone.
The third solution is to make investors happy by returning capital to shareholders through share buybacks, increasing its dividend payment or, as suggested by Greenlight Capital’s David Einhorn, issue a new class of security called iPrefs. Returning capital to investors should not be a problem for Apple because it has $137.1 billion in available cash.
ISI Group’s Marshall said: “This is a do-or-die moment for Apple,” noting that the iPhone, which contributes 65% of the company’s profits, is facing tremendous pressure moving forward.
Apple Inc. (NASDAQ:AAPL)’s Cook and his lieutenants are not deaf, and all they need to do is listen carefully to the recommendations of both investors and financial analysts. The company’s management should continue Steve Jobs’ passion for making Apple a great company. Apple should not allow itself to become or even be described as the J.C. Penney of the tech industry.
Marivic Cabural has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
