At one point, Apple Inc. (NASDAQ:AAPL) seemed invincible. Its stock was growing at an inconceivable rate and the company was constantly innovating, coming up with bold new products that cemented its status as the leader of the technological world.
However, Apple Inc. (NASDAQ:AAPL) has fallen off the proverbial cliff since the third quarter of 2012. Its market cap has fallen from a peak of more than $625 billion to below $400 billion, a drop roughly equivalent to the entire market cap of General Electric Company (NYSE:GE).
Its stock has fallen just as precipitously, from more than $700 to just above $400, a decrease of about 40%. As we look into the future, is it time to abandon ship, or is there still hope for Apple?
Risk factors for Apple
Firstly, the markets in which Apple Inc. (NASDAQ:AAPL) competes are characterized by frequent product introductions, aggressive price cutting, and continual improvement in price to performance ratios. Apple’s stock and market cap have fallen as a result of its failure to match these market norms. Instead of introducing cutting-edge products, it has made a habit of tweaking old products with bells and whistles, such as new colors. As a result, it has lost a considerable amount of market share in both the smartphone and tablet markets.
Apple needs to regain its status as an innovator. Its products can’t simply be reboots of old ones; the company must be at the forefront of any technological movements, as it was with the iPod, iPhone, and iPad.
Competition
Apple Inc. (NASDAQ:AAPL) has also been unable to cut prices, as it refuses to sacrifice quality. That’s a dangerous road to travel. If other companies such as Samsung (NASDAQOTH:SSNLF) can produce better, lower-cost alternatives to the iPhone, Apple will lose market share in both the developed and emerging markets.
Look out for a budget iPhone. Rumors about one have abounded in recent months, and it could be Apple’s saving grace. However, it is unlikely that Apple will be able to compete with Samsung in the long run, and for this reason I am bullish on Samsung.
The hype that once surrounded Apple’s releases now surrounds Samsung, and Samsung is breaking new ground in the development of its phones. Instead of following Apple’s lead, Samsung is taking charge. In technological fields, innovation is key, and Samsung is showing that it is capable of creating new, highly anticipated products. Watch for the stock to soar.
Secondly, Apple Inc. (NASDAQ:AAPL)’s direction as a company is predicated upon a faulty business model. Since its inception, it has obstinately refused to license its operating system to other manufacturers. This was a problem for the company back in the 1990s when this decision nearly killed Apple as a company.
In 2000, only 3.4% of all computers sold were Macs. Apple was saved by the iPod, but it has continually followed the same model that put it in trouble in the first place. Apple refuses to license iOS or OSX to manufacturers, which means that to get either system, consumers have to buy Apple. This makes it so that Apple sells more hardware, but the smartphone market revolves more and more around software.
Apple’s policy constrains software developers, which have no incentive to produce for a constrained, high-end market. Neither tablets nor smartphones require intertwining of hardware and software, and Apple needs to recognize this before it’s too late.
Google Inc (NASDAQ:GOOG)’s Android platform is currently outselling Apple’s iOS 5:1, and there’s no reason that this trend shouldn’t continue, especially with the mobile-app market shifting more and more toward Android.
The same dynamics that almost caused Apple Inc. (NASDAQ:AAPL)’s demise a decade ago could be headed for its iPhone and tablet sales. Android is poised to become as ubiquitous on tablets and smartphones as Microsoft Corporation (NASDAQ:MSFT) Windows is on computers. This is a highly favorable comparison for Google.
The computing market is shifting toward smartphones and tablets, which should cause a spike in the number of devices running Android. This means more money for Google. Research In Motion Ltd (NASDAQ:BBRY) and Symbian operating systems are non-factors, and as a result I wouldn’t be surprised to see Google garner an 85% smartphone and tablet operating system market share, just as Microsoft Corporation (NASDAQ:MSFT) did with the PC market.
Google Inc (NASDAQ:GOOG)’s stock is very high as it is, but if more and more consumers switch away from Apple, we could see it drastically increase. In the case of Google, it’s time to buy.
Finally, watch out for Apple’s strategy when it comes to forestalling the advance of Samsung and other technological giants. The company recently resorted to patent law to stop Samsung from producing phones that threatened them, which is not a recipe for success. Rather, it’s an appeal for governmental protection. Much like American automakers in the 1970s, Apple has decided that with patent protection in place, its ability to make new products seem desirable will be increased, which could explain why the iPhone 5 bears so much similarity to its predecessors.
In the short-term, this strategy should slow down Samsung. Long-term, though, it won’t do anything about the fact that patent protection is no substitute for innovation and the “next big thing.” A company that is reliant upon government protection tends to decline, since they don’t have to actually be better than their competitors to succeed. In the long-term, that leads to disaster.
Conclusion
Apple Inc. (NASDAQ:AAPL) is by no means a crumbling stock. It might not regain its former strength, but it’s not going to collapse in the near-term. New product introductions should continually bolster its strength as well, but at the same time Apple is very vulnerable to the advance of the Android operating system and lower-cost phones.
How Apple expands into emerging markets will be integral to its success in the coming years. The risks for Apple are very high, but it also has good potential to meet them. If it can once again revolutionize technology with a bold new invention along the lines of the iPod or iPad, then it will exceed expectations. If Apple continues to rehash old ideas, tweak old products, and rely upon an erroneous business plan, then it’s time to abandon ship. This writer’s advice:wait for the next few product releases. If there’s nothing special, then get out before the Samsung and Google Inc (NASDAQ:GOOG)’s Android platforms take over.
Hunter Hillman has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.
