Can Apple maintain its shine?

January 22, 2013 by Peter Svensson
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For many investors, Apple's best days are behind it. Competitors are catching up, they believe, and the latest iPhone is stumbling. The company's doubters have backed their conviction with billions of dollars. Last week, the stock fell below $500 for the first time in 11 months. Since Apple's stock peaked at $705.07 on Sept. 21 —the day of the iPhone 5's release— it has fallen nearly 30 percent, cutting Apple's market capitalization by nearly $200 billion.

On Wednesday, Apple —still the world's most valuable public company— gets a chance to rebut the skeptics as it reports financial results for the holiday quarter. But the report could also end up confirming beliefs that the company is losing its edge as an arbiter of innovation and a pacesetter in sales growth.

Apple's perception problem centers on the . Many investors believe the company has painted itself into a corner with the high-priced gadget. The iPhone is more expensive than otjjher smartphones that do many of the same things. The company created the modern , but because of its strategy to sell the iPhone at a large premium, it will be unable to capitalize fully as smartphones continue conquering the world. The iPhone seems destined to remain the phone of the elite who can afford it.

In many ways, the iPhone's global battle with phones running 's operating system is a replay of the Mac-PC battles of the 80s and 90s, when Apple saw its innovative-yet-expensive Mac outflanked by cheaper PCs running Microsoft's DOS and Windows software.

Analyst Michael Morgan at ABI Research believes Apple's share of the global smartphone market will grow from 20.5 percent in 2012 to 22 percent this year and then remain flat. Meanwhile, 's —the world's No. 1 maker of smartphones— is already at 30 percent of the market, and is set to leverage its chip- and display-making capabilities into further dominance, he said.

"Barring an unlikely collapse in Samsung's business, even Apple will be chasing Samsung's technology, software, and device leadership in 2013 —through the foreseeable future," Morgan said.

Investors also see short-term difficulties for Apple. Last week, the Japanese newspaper Nikkei and The Wall Street Journal said the company has slashed its orders for parts because the device isn't selling as well as hoped. Both publications cited unidentified people familiar with the situation.

Sterne Agee analyst Shaw Wu believes the press reports are misleading. IPhone 5 demand, he says, remains robust. He attributes the reports of lower orders to shifts to other suppliers and an improvement in production, which means fewer components are wasted while building the complicated phone.

Apple usually reports the number of iPhones it sells each quarter, so Wednesday's financial update should give investors some indication of where the company is heading. Analysts on average expect the company to show sales of 48 million iPhones, which compares with the 37 million it sold in the same period a year prior.

The wrinkle is that Apple doesn't break out how many iPhones it sells of each type—it has kept selling the cheaper, two-year-old iPhone 4 and last year's 4S alongside the flagship 5.

A key tenet among investors who remain optimistic about Apple: Although the iPhone 5 is too expensive, buyers will shift their attention to the older Apple phones, which they find "good enough."

Analyst Andy Hargreaves at Pacific Crest Securities says demand for new iPhone models is going to falter. Last week, he downgraded Apple's stock from "Outperform" to "Sector Perform" because he believes consumers aren't going to clamor for new hardware features anymore. They'll hang on to older phones longer, and when they buy, they'll buy cheaper models, he says.

This means the total dollar value of the iPhones sold in the quarter may be more indicative than the number of phones sold. Analysts expect the sales were worth $30.8 billion in the quarter, or 56 percent of Apple's overall revenue. Deviations from this figure could cause big movements in the stock price.

There is renewed speculation that Apple could make a cheaper iPhone for the developing world, but most analysts believe the company will stick to its practice of keeping older iPhones in production and cutting their prices as new models come out. The problem is that the price cuts are relatively minor. A two-year-old iPhone 4 costs more than many new Android phones.

When reporting results for the July to September quarter three months ago, Apple shocked Wall Street by saying it expected earnings of just $11.75 per share for the October to December quarter. The company usually lowballs its estimates, but this was unusually far from the $15.59 per share average analyst estimate at the time. The reason, Apple said, was that it had so many new products coming out—including the iPhone 5 and iPad Mini—and fresh production lines are more expensive to run than mature ones.

Analysts then pulled back sharply on their estimates. Their average forecast is now $13.45 per share, according to FactSet.

In terms of sales, Apple said it expects to report about $52 billion in revenue, and analysts have wavered only slightly above that figure—they now expect sales of $54.9 billion.

While Apple's future prospects are in doubt, the company's supporters have one strong argument in their favor: the stock is cheap compared to current earnings, and even if the iPhone's sales growth slows, Apple will continue to generate plenty of revenue. The stock trades at 11 times the past 12 months of earnings, compared with 15 for Microsoft Corp. and 22 for Google Inc. Those figures don't take into account Apple's enormous cash pile —$121 billion— which boosts its value even further.

Despite its size, Apple's stock is no stranger to corrections. In 2008, in the midst of recession, Apple's stock fell by more than half, to under $100 per share. At the time, the iPhone was a year old and hadn't revealed its full potential.

It was only in early 2012 that its decisively outgrew that of Exxon Mobil Corp., previously the world's most valuable company.

A smaller correction last year, also prompted by speculation about the future of the iPhone, took the stock down 16 percent before it rebounded.

"We believe investors that can look through this noise will be rewarded in 2013," said Brian White at Topeka Capital Markets. "The negative sentiment around the stock has reached epic levels that we haven't seen in recent memory and yet we believe the product portfolio has never been stronger."

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3.8 / 5 (4) Jan 22, 2013
"The iPhone seems destined to remain the phone of the elite who can afford it."

I can well afford an iPhone but it's an outdated restrictive device now... many of us have moved away from Apple not because of the pricing but because of the features available on competitor devices.
1.7 / 5 (11) Jan 22, 2013
...many of us... LOL
1.5 / 5 (8) Jan 22, 2013
Within the year, Apple will be half the company it is today.

Before the end of this decade, Apple will have declared bankruptcy and be minor footnote in history.

Apple, Microsoft, Intel... all will be gone, and along with them any claim the U.S. has to technological innovation.

1.3 / 5 (13) Jan 22, 2013
NO, It can't........and keep on hiding Scott.
3 / 5 (2) Jan 22, 2013
People are using older iPhones because the newer iphones aren't worth the money for the amount of features they added.

I'm just guessing that their strategy will keep them afloat for a while, but ultimately fail them. With no tangible huge edge on the market to justify the price difference, all they are is an inflated company that doesn't believe in charity.
1 / 5 (3) Jan 22, 2013
keep on hiding Scott.

1.4 / 5 (10) Jan 23, 2013
Hey, let's be a gadget blog too, as we spin headlines that make a mockery of objectivity, since the sky is falling, well, will be, any day now that tobacco farmer Gore just adopted half a billion dollars of oil money to further heat his six fireplace palace and, oh, buy further into Apple stock offerings:

1.7 / 5 (11) Jan 23, 2013
A sure sign that a company is faltering is when it becomes obsessed with suing its competition rather than competing.

Apple has large cash reserves, so it can tolerate a lower market share for some time, but it will have to become more competitive or face inevitable decline.
2.3 / 5 (12) Jan 23, 2013
Apple temporarily fills the quintessential American consumerist culture vacuum. Since the USA debt slaves are largely devoid of arts and culture, consumerists adopt conversation pieces like Apple toys with which to hopefully glean temporary interest and attention from others. Of course the fad leads to market saturation, and the product is no longer a conversation piece. Then the poor hipster must cough up more cash for a replacement toy or face social isolation in the corportatist USA, which is the greatest fear among the hiveminds
1.7 / 5 (6) Jan 23, 2013
Funny transition happend with the Iphone. The first version came with superior software and average hardware. That shifted now to superior hardware(CPU/GPU design) and average software.
1.7 / 5 (12) Jan 23, 2013
There are only so many ways you can design little white boxes and still call it revolutionary. Colouring them in black or making them out of metal doesn't cut it either. Try and do some valid engineering instead. Message to Apple, the Little White Box Designer is dead. Get over it.
1 / 5 (8) Jan 23, 2013
iPhone must be elite because it's 52% of the current U.S. smartphone market.
Wow, get your facts straight.

2 / 5 (4) Jan 23, 2013
Within the year, Apple will be half the company it is today.

Before the end of this decade, Apple will have declared bankruptcy and be minor footnote in history.

Apple, Microsoft, Intel... all will be gone, and along with them any claim the U.S. has to technological innovation.

You do realize that if Apple keep the same operating expenses it currently has and didn't sell another device its $121 billion in cash and short term assets would keep it operational for at least 10 more years. I think your excitement to bash the status quo has blinded you from the facts.

Apple may not be the technology leader that it was under Steve Jobs but its far from dead. I hope they continue to innovate and keep there products simple.
3 / 5 (2) Jan 23, 2013
Yelmurc is blissfully unaware of the fact that Apple lost around 10% of it's value today.

3 / 5 (2) Jan 24, 2013
Apple has now lost 20 percent of it's value over the last 2 days.

It will lose 30 percent more over the coming year.

1 / 5 (8) Jan 27, 2013
Apple stock is being manipulated by big hedge funds. A company doesnt lose its worth over night. There will always be Apple bashers, just like linux fans ( aka MS bashers ) said 15 years ago they are going to take over the market. Android is doing a great job taking over the market but it will never deliver the product that Apple delivers, they are on two different scales. Just like cars, people want options and the companies will fill the void.
3.7 / 5 (3) Jan 27, 2013
Actually, comapnies lose their worth overnight all the time.

"A company doesnt lose its worth over night." - Evropei

But mostly if the company was never worth it in the first place.

Apple is an overpriced toy company. It is like Mattel or Hasbro and makes shiny toys for big boys and girls.

It has run out of ideas, and is running on empty.

It's stock will be trading 40% lower by year end.

Apple will soon realize this and go on a corporate buying spree to use up some of it's value before it vanishes.
1 / 5 (8) Jan 28, 2013
Keep selling your shares, I am planning on buying Apple at a premium. When most people cant see market manipulation by big hedge funds, its time to make some money from short sighted people.
3 / 5 (2) Jan 28, 2013
A fool and his money...

"I am planning on buying Apple at a premium." - Evropei

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