The slowing iPhone
Apple has been suffering from increased competition in the smartphone business, and sales of the iPhone is clearly slowing down. Most analysts blame Samsung for this since the Korean manufacturer actually surpassed Apple Inc. (NASDAQ:AAPL) in global market share last year, but the real game changer in the industry has been Google Inc (NASDAQ:GOOG) with its Android operating system.
Google Inc (NASDAQ:GOOG) makes most of its money from advertising, so the key issue for the company is to make sure that it will be retaining a big chunk of the traffic – and the advertising opportunity that entails – in mobile computing. That´s why Google Inc (NASDAQ:GOOG) has made its popular Android operating system freely available for any hardware manufacturer willing to use it.
By following this strategy, the online search giant made it possible for different manufacturers to use a deep and broadly accepted ecosystem including the most popular applications, thereby leveling the playing field in the mobile industry.
Samsung did its part by building solid hardware and offering a wider variety of models and price points than Apple Inc. (NASDAQ:AAPL). This allowed the Korean manufacturer to gain a lot of market share in emerging markets, where most of the industry growth is coming from and cheaper alternatives are widely demanded.
Samsung is launching several new versions of its highly successful Galaxy S4 in the short term, and consumers will likely have to wait until fall for new products from Apple. This means that Samsung and other competitors will probably continue gaining market share versus Apple over the next months. Since this is the company´s big cash cow, no growth acceleration should be expected in Apple Inc. (NASDAQ:AAPL)´s financials over the next couple of quarters.
Thank you for your patience
The bad news is that Apple is asking investors to be patient in the middle term, but the good news is that that the company is willing to reward them for that patience. The company increased its quarterly dividend to 3.05, which means a 2.7% dividend yield at current prices, and the new buyback program of $60 billion through the end of 2015 means a massive distribution of capital to shareholders.
Even better, Apple will be issuing low cost debt to finance this program, which will reduce the cost of capital for the company, as well as save a lot of money in taxes. While investors wait for product engineers to come out with new and invigorating launches, Apple has resorted to another kind of engineering – the financial kind – to allocate it´s capital in an efficient way.
Investors have been claiming for more generous capital distributions from Apple for a long time, and they finally got what they wanted. The new dividend and repurchase program should be especially attractive to value investors, and it could put a floor on the stock price while the company works on developing new growth venues.
The future
At a P/E below 11, Apple Inc. (NASDAQ:AAPL) is being priced as a company with lackluster growth prospects–but maybe the future is not as dull as the current valuation implies. There is no slowdown in sight for the iPad: unit sales increased by a remarkable 65% annually in the last quarter, in spite of the fact that competition has been growing in that segment too.
While many Android tablets are cheaper than the iPad, the difference is not as big as in the smartphone business. Besides, the iPad Mini offers a conveniently priced product in that category, so Apple has decided to prioritize long term growth and competitive strength over short term profit margins when it comes to tablets.
iTunes sales grew by a 30% in the last quarter to 4.1 billion, which is a new historical record as Apple continues expanding international availability and broadening its catalog. Competition is getting stronger in this business too, but that doesn´t seem to be hurting Apple´s growth at all.
According to a recent research report by the NPD group, Amazon.com, Inc. (NASDAQ:AMZN) has increased its market share in digital music downloads from 13% three years ago to 22% currently. Besides that, the Wall Street Journal has recently announced that Amazon.com, Inc. (NASDAQ:AMZN) is developing smartphones and audio devices to expand its line of Kindle products. These products would be in direct competition against Apple Inc. (NASDAQ:AAPL), and they would complement Amazon.com, Inc. (NASDAQ:AMZN)´s digital music offering quite well.
Apple still holds a clear leadership position in music downloads at 63%of market share, but the online retailer is a competitor to watch considering its aggressive pricing policy and relentless competitive drive. Music streaming has also been gaining popularity lately, and that´s why Apple is in negotiations with record companies to launch its own “iRadio” in order to effectively compete against the likes of Pandora and Spotify.
Although Apple is facing growing competition and changing industry dynamics in areas like tablets and digital content, those businesses still provide plenty of growth opportunities for the company over the next couple years.
Not only that, Tim Cook unequivocally stated in the press conference that Apple is focusing on new product categories as a growth venue in the middle term, categories being the key word here, as opposed to new versions of existing products.
The rumor mill never stops when it comes to Apple Inc. (NASDAQ:AAPL): the company is admittedly working on a new Apple TV, and Bloomberg has reported that it has a team of around 100 designers working on a new smart watch too. These sound like viable options, and they could put the company back in the spotlight when it comes innovation in the tech industry.
Regardless of the potential financial impact of these new products, if the company can prove to investors that it can still innovate and disrupt different industries without Steve Jobs, that would be a big positive for the stock.
Bottom line
Apple has finally found a smart way to distribute its enormous cash hoard to investors, and this makes it an attractive choice for cash loving bargain hunters. Besides, areas like tablets and digital products still provide exciting growth prospects in the long term, and management has stated that new product categories are on the way. It´s hard to tell for sure if the bottom is finally in for Apple Inc. (NASDAQ:AAPL), but there are some strong reasons to think this is a distinct possibility.
The article Why Apple May Have Bottomed After Earnings originally appeared on Fool.com and is written by Andrés Cardenal.
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