In spite of having a number of solid growth prospects, the share price of Apple Inc. (NASDAQ:AAPL) keeps going south, as more and more analysts are issuing bearish views and weak outlooks. With so much negative sentiment, it might be worth taking a look at some headwinds that Apple faces in the near-term, and possible remedies.
1. Competitive Pressures Are Surging
Samsung’s dominance and rapid growth in the global smartphone marketplace is a major concern for Apple. Samsung is launching newer tablets, which ramps up the competition even more in an already crowded space. According to comScore, Google’s Android OS, which is used by multiple hardware manufacturers and Apple Inc. (NASDAQ:AAPL)’s iOS are dominating the U.S. smartphone space with roughly 90% of the market. This market share dominance gets stronger with the two platforms’ well developed ecosystems, making it difficult for other competing platforms to narrow the gap.
Apple makes consumers sticky with a huge content ecosystem from iTunes. Users have thousands of books, movies and songs in iTunes, which makes them reluctant to move. However, with increased competition especially from Samsung, Nokia Corporation (ADR) (NYSE:NOK) and Research In Motion Ltd (NASDAQ:BBRY) around the world, this market share dominance can diminish over time. Competition from other software and hardware firms is only going to accelerate.
Research In Motion Ltd (NASDAQ:BBRY)’s newly launched BB10, along with newer and fresher devices and much more enhanced app ecosystem, makes it a stronger force. BlackBerry now has in excess of 100,000 apps, and sold more than 1 million Z10 devices. And its Q10 device, which is the Qwerty-keypad version, should gain more traction among Blackberry enthusiasts, as well as enterprise customers.
2. Product Cycle Risk
The recent product cycle of Apple Inc. (NASDAQ:AAPL) has failed to deliver the growth and market share, as investor expectations from the company was very high. From a purely product life-cycle standpoint, compressed margins, increased competition, and lower market share are characteristics of a company which has entered the maturity phase in the product life-cycle. And Apple fits the bill for all of the above mentioned characteristics and needs to ramp up its innovation and introduce newer and differentiated products rapidly to gain more market share.
While the likelihood of the company striking up newer carrier partnerships definitely exist. Apple Inc. (NASDAQ:AAPL)’s ability to get newer carriers to adopt its products is vital for the company’s growth. The market for most of its iPhone and iPad product lines has already been heavily tapped by the company in most developed markets, the company’s ability to win over customers in key emerging markets will be crucial. The slower pace of carrier additions will increase investor skepticism.
3. Secular Decline of PCs
The sales of PCs are going through a secular decline, as consumers increasingly access the internet through a number of alternate devices including smartphones, tablets and even through e-Readers. And Apple’s sales from the Mac line is going down as well, as consumers increasingly prefer iPads as an alternative.
In the most recent quarter, the number of Mac units sold declined 22% compared to Q1 FÝ 2012, a trend that is most likely to continue. Apple Inc. (NASDAQ:AAPL) is not the only PC maker getting hurt, other PC manufacturers like HP and Dell are also feeling the heat.
4. Inefficient Allocation of Resources
With more than $137 billion in cash, Apple has roughly one-third of its firm value in cash. Apple generates substantial amounts of Cash from its operations every quarter, but is not handing out more to shareholders. Apple Inc. (NASDAQ:AAPL) generated more than $23 billion of cash from its operating activities in the last quarter, but the company is buying back roughly $10 billion of shares. As the company’s cash hoard is earning meager returns of slightly above 1%, the firm’s resources are not being allocated properly.
Apple can easily increase its dividend substantially from its current yield, acquire a number of companies, small and big, and increase its buyback program substantially from current levels. These steps will definitely address the concerns of shareholders and potential investors.
5. Slower Pace of Innovation
The pace of innovation in the smartphone and the broader IT Hardware space is very high. With new and rapidly evolving technologies coming to market, Apple Inc. (NASDAQ:AAPL)’s slower pace of innovation is increasing skepticism among investor groups. Apple is not handing out the breadth of product lines that consumers want, i.e. bigger screens in phones, lower priced sets in certain markets etc.
Apple’s ability to deliver newer products with completely new features to its already large installed customer-base on a timely basis is rather crucial for the company’s future growth trajectory.
The Takeaway
With Apple Inc. (NASDAQ:AAPL)’s cash earning very little returns, the company should take steps to increase shareholder value. Growing the pace of innovation rapidly, along with the addition of newer carriers will be great moves by the company. Success in key strategic markets like China will be crucial for the company, as most of its addressable market in developed countries already own Apple products.
The article Apple’s Notable Headwinds originally appeared on Fool.com and is written by Ishfaque Faruk.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
