How Much Lower Could Apple Inc. (AAPL) Go?

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Apple Inc. (NASDAQ:AAPL) set another 52-week low yesterday, hitting $419. The company's journey from a 52-week intraday high of $705 to today's low only took about six months. The market has been ruthless: Whenever a bottom seemed in sight, shares just kept sliding. To add perspective, the Dow Jones Industrial Average actually rose almost 4% during the same period. This leaves investors with two pressing questions: What is driving Apple's decline, and how much lower could the company go?

Apple Inc. (NASDAQ:AAPL)

A hardware-dependent business model In an unusual turn of events, Apple Inc. (AAPL)'s close rival, Google Inc (NASDAQ:GOOG), has risen about 19% during the last six months, in stark contrast to Apple Inc. (AAPL)'s 40% decline. In fact, yesterday Google set another all-time high, at $820. Google's favor with Wall Street provides insights for understanding Apple Inc. (AAPL)'s decline.

Unlike Google, Apple Inc. (AAPL)'s revenue relies heavily on unpredictable blockbuster products. Yes, Apple Inc. (AAPL) has iTunes, software, and services as well -- all more consistent and predictable forms of revenue. But most of its revenue comes from iPhones, iPads, or Macs. Together, these three segments make up 86% of Apple Inc. (AAPL)'s revenue; iPhone sales alone make up 56%.

As the world's leader in online search, Google attracts investors who are betting heavily on continued growth in revenue from advertising on its own sites, and from Google's partner sites, as news, media, and shopping continue to bring more business online. This revenue stream is much more predictable and reliable than Apple's product sales -- hence Google's consistently higher P/E ratio.

But Apple Inc. (AAPL) leaves investors worried about the future. They wonder: Could Apple Inc. (AAPL) end up losing favor with consumers over the next five years? If it does, Apple Inc. (AAPL) could lose significant momentum, or even experience year-over-year declines in sales in major product categories.

Some experts have suggested that Apple Inc. (AAPL) is already losing ground with consumers. The creative director behind Apple Inc. (AAPL)'s successful "Think Different" campaign, Ken Segall, notes that Samsung is making "remarkable inroads in a very short time." He explains that Samsung spends far more money on advertising that goes against Apple's product-based approach, with a people-based approach that plays off "growing negative perceptions about Apple."

Given Apple's dependence on blockbuster product launches, a negative perception is a definite threat to Apple Inc. (AAPL)'s cash flow. Meanwhile, investors are confident that Google will remain a substantial player in the worldwide online search market for years to come.

Apple's missing premium In short, three factors ultimately determine a stock's premium:

1. Growth prospects

2. Risk

3. Profitability

In all three of these areas, Apple is facing significant headwinds.

Apple Inc. (AAPL)'s growth prospects are uncertain. In the fourth quarter of 2012, Samsung sold 62 million smartphones, compared to Apple Inc. (AAPL)'s 47.8 million iPhones, and surpassed Apple Inc. (AAPL) for the first time. Furthermore, Apple Inc. (AAPL)'s growth has slowed significantly. Revenue in the first quarter increased just 18% from the year-ago quarter. Year-over-year revenue in the first quarter of 2012, on the other hand, grew 73%.

Even Apple's renowned leadership in tablets is slipping. According to a Feb. 7 research report from Canalys, Apple Inc. (AAPL)'s worldwide tablet market share dipped below 50% for the first time. Google, Samsung, and Amazon.com, Inc. (NASDAQ:AMZN) are seeing success at lower price points. Chitika, for instance, reports of a 5% decline in iPad web traffic during the last three months due to the success of Amazon's Kindle Fire and Samsung's Galaxy tablets.

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