Apple Inc. (NASDAQ:AAPL)’s stock had a decent rally after the company made a number of new announcements including the massive buyback, increased dividend, and the company’s historical bond issuance to fund those sizable payouts. Many investors view such large amounts of payouts to shareholders as a sign that the company is maturing and doesn’t have too many exciting projects to invest in.
While that view on corporate strategy might hold true for a number of firms, it doesn’t necessarily hold true for Apple. The company’s fundamental position is solid; however, the dark side of an investment in Apple Inc. (NASDAQ:AAPL) should be carefully studied before committing more capital to acquire Apple shares.
1. Product line
The company’s existing product lines consist of products that consumers love across the globe. However, most of these new products that Apple has introduced have been slight variations of existing Apple products. In other words, Apple Inc. (NASDAQ:AAPL)’s game-changing innovation hasn’t come around since the launch of the first iPad. And also the company’s product line of slight changes leads to sizable cannibalization as well, which eats away the company’s margins.
For example, the iPad Mini, which comes at a much lower price point relative to the original one, has been eating away sales from the higher margin iPad, and as a result, Apple’s average selling price for iPads came down by ~$18 per unit.
In addition, the most compelling reason behind the bearish stance towards Apple Inc. (NASDAQ:AAPL) has been the company’s reduced pace of innovation. While, there is no doubt Apple can bring unique products to the market, the company remains tight-lipped about its future product pipeline other than stating that it will launch newer products in the latter half of 2013. Apple’s rival Research In Motion Ltd (NASDAQ:BBRY) stock fell off a cliff in the past because the company wasn’t innovating rapidly enough.
2. Margins will contract
In the last earnings report of Apple Inc. (NASDAQ:AAPL) the company’s gross margins contracted substantially as expected. And in the next quarter, the company’s CFO guided that the gross margins will come down even more and be in the range of 36%-37%. And the reason behind this guidance was the sizable decrease in the average selling price for the iPhone and to a smaller extent the iPad.
Revenues from the iPhone make up more ~53% of total Apple revenues and the company’s selling price for the iPhone came down almost $30 from the previous quarter. As the company sells older generation iPhones, which have a lower price point, as well as selling more phones in key strategic markets like China, the company’s gross margins will come down even more.
However, large sales volume might offset the comparatively lower margins by bringing in more gross margin dollars. But the company’s huge size limits its ability to grow rapidly, along with increasingly more saturation in smartphone markets especially in the developed countries.
3. Heightened competition
The smartphone industry is increasingly becoming more and more competitive with Apple Inc. (NASDAQ:AAPL)’s rivals rapidly bringing newer products to the market. Android-based phones by Samsung have a firm grip in the global market place, and Samsung just did a global launch of its new Samsung Galaxy S4. And the S4 comes with a larger 5 inch screen size and a comparable price point.
The other leading Android player, HTC is also coming to market with its HTC One phone very soon.And also Blackberry’s long awaited Q10 is expected to enter the U.S. market in the coming weeks, after launches in Europe, Canada and some other countries. Blackberry’s Z10 got a mixed reception from customers and carriers, but the Q10 will appeal to core Blackberry users. The BB10 Operating System is a major enhancement with a much better and smoother user interface from earlier versions by the company. And BB10 managed to add more than 100,000 apps as already, and is likely to add a lot more in the coming months as well.
The entry of newer-age gadgets poses additional pressure for Apple Inc. (NASDAQ:AAPL), as the company has to play defense at least for Smartphones until it launches newer product lines later this year. Also, the incremental competition might force Apple to slash prices even more in the near-term to incentivize customers to buy Apple products instead of going to rival firms.
However, Apple still holds an enviable lead in the market for tablets with an estimated market share of close to 40% and the company sold iPad units almost double the amount sold by the next biggest player, Samsung. However, up and coming players like ASUS and Windows might pose more pressure on Apple Inc. (NASDAQ:AAPL) to cut down prices for its tablet product line.
The Bottom Line
The company’s heavy investments in R&D and long-term experience of building innovative products should hold up well. And the company should try to roll-out newer products to the market as soon as possible and play offense against the competition.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
The article The Bear Thesis for Apple originally appeared on Fool.com.
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