Apple Inc. (AAPL) Faces Upside Risk, Downside Is Not Limited

Apple Inc (AAPL)Even after Apple Inc. (NASDAQ:AAPL)’s unconvincing quarterly performance, the bull market is still ardently holding on to what it describes as ‘ huge upside potential.’ The earnings came and went, but the stock failed to rise, save for a few ripples. As of this writing, unconfirmed reports saying that iPhone 5S pre-sales by Japan carrier KDDI will start on June 20 have sent the stock up to $430 as of this writing. Whether or not this gain is sustainable depends on validity of the reports.

In my opinion, I believe that Apple Inc. (NASDAQ:AAPL) has the leverage to reverse its troubled fortunes. It has overflowing coffers, unquestionable brand loyalty, and sizeable market share in mature markets. Nonetheless, this perceived leverage does little to justify the stock’s performance over the past several months. The chin scratching reality is that the headwinds have become too strong for Apple to bear.

Renewed focus on emerging markets a story of too little too late

Earlier in the year, analysts, both sell side and buy side, touted the idea of an ‘iPhone mini’, or a cheaper iPhone if you will. Essentially, the idea was for Apple Inc. (NASDAQ:AAPL) to introduce an iPhone that would present a budget proposition for budget inclined consumers in emerging markets. However, at that time, critics and ardent Apple Inc. (NASDAQ:AAPL) lovers slammed the idea, saying that it was not only far-fetched but that it would also erode Apple’s upscale image.

As the hype over the ‘iPhone mini’ fizzles out, something very interesting has come out. Apple already had a strategy in place for budget tended consumers in emerging markets, particularly in India. Instead of introducing a cheaper iPhone, it went ahead and offered iPhone buyback incentives; a move that has paid off handsomely in view of the sales volume trend in the Indian market. Under the plan, Indian consumers can get an older generation smartphone for as low as INR 7000, that’s about $130.

Because of this penetrative marketing strategy, Apple Inc. (NASDAQ:AAPL) has managed to make significant inroads in India. Going back into 2012 and even 2011, the company’s sales and profits in the country have grown exponentially. In fiscal 2012 for instance, Apple’s profits in India grew a mind boggling 431% year over year to come in at $57 million. Analysts argue that the iPhone maker’s top line in India will sail past the $1 billion mark in 2013.

With all these forward-looking prospects, why do I still argue that the renewed focus on emerging markets is a story of too little too late?

Unlike mature markets, carriers in emerging markets rarely subsidize smartphones. And even if they did, Apple would be in a better position if it inked a deal earlier on. Why is this? Not only are competitors’ handsets, which are more or less equivalent in functionality, cheaper, but the battle for a third ecosystem has spilled over into emerging markets.

Trying to establish a footing in emerging markets now would be by far the hardest battle in Apple Inc. (NASDAQ:AAPL)’s history. Not only will its price points work against it, but competition from other more desperate players like Nokia Corporation (ADR) (NYSE:NOK) and Research In Motion Ltd (NASDAQ:BBRY), coupled with the constant pressure from Google Inc (NASDAQ:GOOG), will push the company under.

Google Inc (NASDAQ:GOOG), particularly, is set to make headway in emerging markets moving forward. Adding to the already overpopulated list of android handsets will be Samsung’s Galaxy S4. Peter Misek, an analyst with Jefferies, believes that the device will sell 10 million units within the first month. In my opinion, this is very possible and it will in fact add to the Galaxy S3’s success. This will be a huge win for Google as it will act as bait to rope in more device makers into the Android umbrella.