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 iPhone. Many
investors believe the company has painted itself into a corner with the
high-priced gadget. The iPhone is more expensive than other smartphones
that do many of the same things. The company created the modern
smartphone, 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 Google's Android 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, South Korea's Samsung Electronics -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 iPhone 5 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 market
capitalization 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."