$820 — that’s the cost Samsung Electronics Co., Ltd. (KRX:005930)’s latest flagship phone, the Galaxy S4. For the price of roughly two shares of Apple Inc. (NASDAQ:AAPL), an investor in the Cupertino tech giant could save themselves thousands of dollars in potential capital losses.
Most investors continue to underestimate Apple’s problems — that is, how far it’s fallen behind its once-upstart rivals.
Why Apple still isn’t cheap
Ahead of Apple Inc. (NASDAQ:AAPL)’s recent earnings report, I wrote a piece titled “Why Apple Still Isn’t Cheap.” My article garnered nearly universally negative responses, most of which were nothing more than ad hominem attacks.
Of course, the negative responses only emboldened my original thesis — that there were many investors out there who continued to cling desperately to their Apple Inc. (NASDAQ:AAPL) shares, lashing out angrily at anyone who would dare to question their darling stock.
Famed bond investor Jeff Gundlach made a similar point on CNBC earlier in the year.
“Listening to people talk about Apple, I’m still impressed with the obsession with people have with — do I buy it now that it’s down a little bit? Institutional hands, have they sold it? Do they own it? This is not the type of talk that goes on at a real, enduring bottom in an asset class or stock.”
Gundlach was ultimately right. At the time he gave that quote, Apple Inc. (NASDAQ:AAPL) shares were trading above $480 — later dropping below $400 earlier in April.
Apple is an iPhone company
Although Apple makes a fair number of products, the company is largely dependent on just two: the iPhone and iPad. (This is in line with Steve Jobs’ philosophy of a laser-focused company.)
And of those two, the iPhone dwarfs the iPad in terms of importance. In Apple Inc. (NASDAQ:AAPL)’s last quarter, the iPhone brought in roughly twice the revenue of the iPad — and the iPad itself brought in more revenue than everything else combined.
Consequently, all things considered, Apple is really a story about the iPhone — everything else is fluff.
The iPhone is facing serious headwinds
That brings us back to the $820 every Apple investor should spend on a Galaxy S4. Those investors will discover a device superior to the iPhone.
When Apple introduced the iPhone back in 2007, it was truly a revolutionary product. It went on to completely disrupt the phone market, creating a new standard for smartphones and largely eroding
But that changed last summer. Samsung Electronics Co., Ltd. (KRX:005930)’s Galaxy S3 was the first phone on the market that was at least as good as Apple’s flagship. Part of that was Samsung’s hardware innovations (a larger screen) but most of it was due to Google Inc (NASDAQ:GOOG)’s advancements with Android.
For years, Google Inc (NASDAQ:GOOG)’s Android was a poor knock-off of Apple Inc. (NASDAQ:AAPL)’s iOS. While it was always infinitely more customizable, it suffered from both stability and speed issues — it was noticeably slower than the iPhone, and apps would frequently crash. But that changed completely with Android 4.1 (Jelly Bean).
An Android phone running Jelly Bean (like the Galaxy S4) is just as snappy and responsive as an iPhone, and nearly as stable. At the same time, it retains Android’s customization and offers features the iPhone can’t match.
One of those features was Google Inc (NASDAQ:GOOG) Now, which was ported to the iPhone earlier this week via an app in the app store. Apple users will find that Google Now is a far superior alternative to Siri — able to anticipate a user’s search needs ahead of time.
But that’s just last year’s Android. Google’s next version of Android (named Key Lime Pie) might be unveiled this month. With that release, it’s likely that the iPhone will only fall further behind.
Not a two-horse race
Some people may be inclined to read this as simple rehash of the Samsung versus Apple debate. But that isn’t the case at all. If Samsung Electronics Co., Ltd. (KRX:005930)’s Galaxy S4 isn’t available, that money could be put toward an HTC One or an LG Optimus G. Alternatively, it could be set aside the upcoming Sony Corporation (ADR) (NYSE:SNE)
Xperia Z or Motorola’s long-rumored “X phone.”
The larger point is that, at long last, Google’s Android has finally caught up. Once upon a time, criticisms like Roger McNamee’s claim that Android phones are only cheap knock-offs of the iPhone, were true — but they aren’t anymore.
No doubt it will take some time to play out, and many consumers will stick with Apple out of brand loyalty. But after losing its quality edge, Apple’s iPhone is likely to struggle in the coming years.
The iPhone has been outgunned
Apple shares rallied a staggering 700% from the beginning of 2009 to the end of August 2012. Most of that rally was predicted on the company’s incredible earnings — earnings that led to the company building a cash pile David Einhorn characterized as a “war vault.”
But nearly all of that money was acquired selling the iPhone — a device that, until recently, was in a league of its own.
But the iPhone is now outmatched and outgunned by its Android-powered rivals. It won’t happen overnight, but consumers will soon learn that Android phones offer a better mobile experience than the iPhone.
As that happens, iPhone sales will dwindle — along with Apple’s profits.
The article The Best $820 an Apple Investor Can Spend originally appeared on Fool.com is written by Salvatore “Sam” Mattera.
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