To say 2012 was a stressful year for Apple (NASDAQ:AAPL) investors is an understatement. After a run-up that saw its stock price peak at over $700 in September — making Apple the most valuable company in history — it shed 25% of its value over the next three months, despite a slew of new products including the highly anticipated iPhone 5.
What’s in store for 2013? Is it worth investing now at $523? That’s a huge discount from just a few months ago, but expensive compared to the $456 the stock commanded last January — or does AAPL still have room to go lower? What about the predictions that Apple could hit $1,000 and become a trillion-dollar company?
The iPhone and iPad — the mobile powerhouses that now account for around three-quarters of Apple’s revenue and near that share in profits — are no longer the undisputed kings of their categories. Apple’s early ownership of the tablet market has slipped to near 50% as competitors like Samsung, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) refine their versions. Apple has even been forced into a size/price battle, releasing the iPad Mini late last year in response to the huge success of smaller, cheaper Android tablets.
Worse, the iPhone 5 failed to knock consumers’ socks off and for a while, Samsung’s Galaxy S III took the smartphone sales crown. Numerous tech and gadget sites gave Samsung’s flagship handset the thumbs up over the iPhone 5, marking a point where Apple’s products may no longer be the must-have devices. Certainly, the iPhone and iPad remain category leaders and highly coveted, but a new version no longer guarantees long lines of rabid customers.
With Google gunning to duplicate the success of its Nexus tablets in the premium smartphone market using its Motorola acquisition, expect 2013 to be tougher for Apple, unless the next iPhone unveil includes some truly radical new features.
What about China? With a population more than four times that of the U.S. and now the world’s largest smartphone market, could China provide AAPL the kind of boost that leads to a repeat of 2012?
In 2011, the average annual income in Beijing was a hair under $9,000 (RMB 56,061). Keep in mind, the Beijing region is tops in China, where the average urban salary is just $6,813 (RMB 42,452). China’s extensive rural populations have much lower incomes. By comparison, the U.S. Social Security Administration set America’s national average wage index for 2011 at $42,979.
For an unsubsidized iPhone 5, American shoppers pay anywhere from $649 to $849. In China, the iPhone 5 starts at around $850. Even with carrier subsidies that reportedly dropped the cost to $96 (on a hefty contract), you don’t need a math degree to see that Apple is never going to see the same sort of success in China that it does in the U.S. without a cheaper phone. And a cheaper phone means lower margins.
Apple has done OK, moving 2 million iPhone 5s on its opening weekend in China, and according to The Wall Street Journal, analysts predict it will sell 165 million iPhones in China in 2013, double 2011’s sales. China is Apple’s fastest growing market and accounts for roughly 15% of the company’s total revenue.
That success has to be tempered by the price barrier to widespread adoption of its products, the popularity of Android smartphones and growing homegrown competition from Chinese manufacturers like Huawei and ZTE.
So, forget about China providing some sort of blowout miracle boost.
Beyond the mobile category, Apple’s PC business remains solid, even as other computer makers like Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) flounder. PC sales are expected to grow just 2% in 2013 despite the recent launch of Microsoft’s (NASDAQ:MSFT) long-awaited Windows 8 operating system. If 2013 is anything like 2012, Apple will be providing the growth while sales of Windows-based PCs actually decline.
Still, Apple made only $7 billion or so from Mac sales in 2012, so don’t expect any major news on this front.
What about an Apple TV? That’s an interesting prospect. However, beyond the facts that 1) an AppleTV (not the existing set-top box, but an actual Apple-designed TV set) has been rumored to be imminent for several years now; 2) trying to negotiate content deals is a minefield; and 3) the reality of data-cap allocations set by the cable companies/ISPs that Apple would be replacing in the living room — there’s price.
Apple doesn’t do cheap gear. It does high-end design with premium materials. Consumers may have been willing to fork over $500 for an iPad or $150 (on contract) for an iPhone in record numbers, but would they fall over themselves to spend $2,000 on a TV set with an Apple logo?
If Apple does release a TV sometime in 2013, it has the potential to boost revenue in a meaningful fashion and, if it’s successful, to keep that new revenue stream going. Outside of a launch-day frenzy, though, I don’t see a TV being another runaway hit like the iPhone. Rather, it would carry significant risks: This is a new market for Apple (despite its toe-in-the-water set-top box), a big price tag is associated with it and elevated consumer expectations will be difficult to meet. An Apple TV could just as easily be a failure as a hit.
There’s also the not-so-trivial matter of corporate taxes. Although Apple has a cash hoard of over $121 billion, a recent Wired article point out that $86.2 billion of that is held by foreign subsidiaries. With a Senate investigation on corporate tax avoidance underway, Apple could have to fork over as much as $28.5 billion of that to the IRS.
In short, individual product launches, events and earning results could still create stock price fluctuations that short-term investors could use to their benefit (if you can figure them out in advance). But I wouldn’t buy Apple now expecting 2013 to repeat the 67% surge the stock racked up in the first half of last year.
However, Apple remains a dominant consumer technology force. It’s entrenched and expanding its markets steadily (even in the face of increased competition). And it’s maintaining high profit margins. Apple may have some revolutionary hits in the pipeline yet, but by now even minor yearly refreshes are enough to keep momentum going for at least a few more years. It’s started paying out dividends, too.
To me, that makes it an excellent long-term investment.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.