October wasn’t a kind month for Apple (AAPL: Charts, News, Offers) investors. First, former Apple CEO and American business icon Steve Jobs passed away on October 5, and then the company missed earnings estimates for the first time in six years on October 18. Although most analysts are still bullish on the company’s prospects – given its strong cash flow, high margins and lengthy product cycles – investors should be concerned regarding the future of the company after its iPad and iPhone product cycles wind down. While neither product has yet to encounter the imminent law of diminishing returns, it will only be a matter of time before Apple consumers start to crave the next “big thing”, on the scale that only Steve Jobs was able to satisfy.
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Four years ago, Research in Motion (RIMM: Charts, News, Offers) shareholders felt invincible with the widespread, unstoppable adoption of the Blackberry. Likewise, Motorola (MSI: Charts, News, Offers) shareholders were sitting pretty at the turn of the millennium, with its StarTac clamshell phones being the de facto status symbols of the late 1990s. Shares of both companies, which were both seen as unstoppable as Apple at the apex of their popularity, now trade at a small fraction of their peak prices. These two should serve as cautionary tales for Apple investors – since the iPhone and the iPad respectively account for 52.5% and 12.25% of the company’s revenue. Meanwhile, both the prices and gross profit margins for the two products is forecast to steadily decline over the next five years. Company-wide margins have eroded slightly from 2006 to 2010, dropping from 26% to 24%.
Google’s (GOOG: Charts, News, Offers) Android phones, led by Apple’s arch-rivals Samsung and HTC, are also forecast to gain ground against the iPhone with a wider variety of devices. Amazon (AMZN: Charts, News, Offers) has also launched a preemptive strike against Apple’s iPad with its eagerly anticipated Kindle Fire – priced at $199 with direct access to Amazon’s online store and cloud services. This gradual erosion is troubling since Steve Jobs intended the iPhone and iPad to completely replace its weakening Mac business, which only accounts for 12% of the company’s revenue.
Apple investors believe that Jobs had left the company’s product cycle secure for at least two more years before the iPhone and iPad product lines become exhausted. However, once these lines, which account for nearly two-thirds of the company’s earnings, grow stale, what will the “next big thing” be? In 1996, Jobs declared, “The PC wars are over. Done. Microsoft won a long time ago.” It was from this statement that Jobs shifted his focus from Apple’s Mac line to his new creation – the iPod – which would change the company from a computer manufacturer to the gadget producer that would spawn the iPhone and the iPad. The iPod, which has now been cannibalized by the company’s iPhone, now only accounts for approximately 1.6% of its revenue, but its tiny Nano still remains popular.
Investors who trust Apple to continue innovating are turning their attention to Johnathan Ive, the company’s chief designer, and Scott Forstall, the head of Apple’s mobile division. Ive and Forstall’s respective physical and software aesthetics have defined Apple’ modern “Steve Jobs generation”, and Apple fans are hopeful that they can continue where Jobs left off.
Last week, Apple reported earnings of $7.05 per share, well below the analysts’ estimate of $7.31 per share, but far better than the $4.64 per share it earned in the prior year quarter. CEO Tim Cook attributed the disappointing earnings to fewer iPhone 4 units being sold, due to customers holding out for an expected iPhone 5, which turned out to be the iPhone 4S. Yet Apple sold more than 4 million iPhone 4S units in the first three days. By comparison, the iPhone 4 sold 1.7 million units in its first weekend. These sales were not included in its quarterly earnings, which has led analysts to predict that Apple will beat estimates by a wide margin next quarter.
Other News About AAPL
Apple Misses Earnings Estimates!
Apple misses for the first time in six years.
Scott Forstall, the Sorcerer’s Apprentice at Apple
What does Forstall have in mind for the future of iOS?
Other Stocks in the News
This Is The Google Music “Twist”: You Can Share Songs After Buying Them
Google launches its own music service to compete against Amazon and Apple.
Baidu.com Shares Downgraded to a “Neutral” Rating by Goldman Sachs Analysts
Baidu gets downgraded on macro concerns.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Apple didn’t miss anything. It was the stupid edge fund brokers that purposely over estimated, far and above Apples estimate, so they could drive down the stock price are driving it up. You comments show you aren’t any better than the hedge fund crooks.
Steve Jobs did not leave without at least a five year vision for Apple. As a former business man this is a common practice for any well managed company. This being said your comments about Apple are very shallow and lack real world experience and understanding.
Hello??? There are so many problems with your article.
1-Apple is not a pure hardware play, in fact, they outsource the manufacturing, it is the integration of the eco system. Not to mention iCloud.
2-The more Amazon sells Kindle, the more money they lost, see AMZN tummbling today. This applied to Google’s free Andriod.
3-There are lawsuits going on with all, who knows the final outcome. Especially no one is God.
4-Misses the analyst estimate but surpass the company’s guidance. Analyst uses a multiplier, of course they are wrong 100% of the time.
5-iPhone 5…not too many will cancel their 4 to get into a 5, so it will be released by next June.
Bottom line…stop to act like you know everything, otherwise, find a job at Apple and be Apple’s CEO.
I think the recent dive in the stock is just a market speculation cause by analyst who like to play these scare tactics once in a while..it is good business too…make people sell, buy cheap and them see your stock regain and become higher…apple missed on expectations…but they knew and told everyone what they expected…the delay of the 4S was a major reason but last know number was 4 million sold on the first day, which tells me the next quarter will be amazon for them…not to mentioned 81 billion in cash..