Apple Is Losing Steam Very Fast

Published by Filipe R. Costa on Thu, 24/01/2013 - 11:57 in

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Apple reported record earnings yesterday but investors didn’t like the music coming from the conference call and pushed shares down 9% in after hours trading. Is the tech giant dying?

Apple may have reported record iPhone sales and a record quarter but a slowing growth in sales and profits is concerning investors. Profit margins are also down 6% to 38.6%, and investors fear the iPhone may be entering a declining phase. Increased competition from companies like Samsung are also cause for concern.

Concerns about demand for iPhone and iPad mounted in September when Apple shares were trading around $700. Since that, shares were pushed down to the current $468 quote last seen yesterday in after hours trading. In three months, the company lost one third of its value while equities have been rising in general.

Even though many see the drop as a buying opportunity concerns about Apple are substantial and unless Tim Cook is able to deliver as Steve Jobs has done in the past, Apple may face hard times as the likes of Nokia and Research in Motion had. Of course that if we look at current earnings projections, Apple is trading at a cheap P/E multiple, but the problem is: can Apple deliver the kind of sales that make for that earnings projections? In my view, it can’t. Unless Tim Cook opens a new line of products, simply upgrading iOS won’t be enough.

Over the last few years, Apple has been relying on the iPhone to drive both its top and bottom line. While in 2007, iPhone sales represented just 8.3% of the company’s business, last year iPhone made more than 52% of it.

The company is relying too much on a device that barely changed over the last two years and many potential clients are now happy to buy prior versions of the current iPhone 5 at a discount instead of paying top dollars for the newest gadget. At the same time, Mac sales are dropping and iPad mini is not really adding much as part of its buyers were potential clients for the regular version.

Android-enabled smart phones and tablets are growing and becoming stiff competition for Apple products, in special products from the rival Samsung, which has been performing very well. To enter emerging markets, Apple will have to innovate and also to deliver a low-end iPhone version, which is said to already being developed. Time is running out for Tim Cook and a once loved company does not take too long to being dropped in the can. That was the case for Nokia and also for Research in Motion in the past. But apparently, those two are growing again, and may do so at Apple’s expense...

As a final comment, Apple is reported to have $137 billion in cash. Cash is king but in Apple’s case, the proportion of cash to assets is ridiculous high. The accumulation of cash during the last few years clearly shows me that the company doesn’t know what to do with it. It could have invested it, otherwise it should be returned back to investors in the form of hefty dividends or an aggressive stock repurchase program.