With Google (NASDAQ:GOOG) fresh off all-time highs and Apple (NASDAQ:AAPL) near 52-week lows, the question begs to be asked: Did Apple’s proprietary strategy backfire the same way it did in the 1980s and 1990s when it battled Microsoft (NASDAQ:MSFT) and PCs?
Even though this is a straightforward topic, it was difficult for me to write. I am an Apple fan with more than one gadget made by the company. An iPod Shuffle is brilliant for working out, while no one comes close to the overall experience of the iPad. Those other tablets — like a Kindle Fire in my case — do indeed stay in the drawer gathering dust, as Tim Cook has been quoted saying.
Still, it is pretty obvious the competitive pressure has substantially increased on this most innovative of computer makers. Eric Schmidt, Google’s executive chairman, said so last December about Apple and the mobile market: “We’re winning that war pretty clearly now.”
There are about 1.3 million Android devices activated each day at last count. A year ago, activations were running at a rate of 850,000 per day, while two years ago that number was at 500,000. Android devices are clearly gaining momentum, and so is demand for Google services that are embedded in the “free” operating system.
The issue is that Apple has always made superior quality products that are (unfortunately) priced … er, “superiorly.” In most emerging markets, smartphones are not subsidized, so an iPhone 5 costs $650 and not the $199 most U.S. consumers are used to seeing. If the global market is flooded with cheaper decent-quality Android phones, many consumers will give them a shot.
Samsung (PINK:SSNLF), for instance, went with a strategy that covers both high- and low-end phones as well as varying sizes — it invented the phablet in the face of Galaxy Note and the phabletesque Galaxy S3.
Apple went with Steve Jobs’ famed minimalist approach that worked fabulously as long as it had first-mover advantage with premium tablets and smartphones. The trouble is that it is impossible to invent wildly popular, never-before-seen products all the time, which has been reflected in the company’s operational performance as it accelerates spending amid slowing sales to catch up with Android competitors.
Apple’s stock is down partly because earnings are expected to be down 16.9% in the present quarter and flat overall this year. The company still is profitable, with an operating margin of 33.46%, though that number is down from its 39.26% peak in the first fiscal quarter of 2012. In the same period, return on equity has dropped from 47.1% to 38.4%.
I don’t think Apple needs to return to that peak profitability, but I do think it needs to broaden its product portfolio as well as go downmarket some more — as it did with the iPad Mini — to compete with Android devices better. Asian manufacturers typically have favored market share gains over higher margins over the years, which is why Apple will likely have to level with them or risk even more market share losses.
The present decline in Apple shares is not unprecedented. In 2006, for instance, the stock slid from $85 to $50 over a similar period, and it turned out to be a correction. This time, a nearly 40% cut in shares hurts … but it’s more melodramatic when the share prices involved are “$700” and “$430,” and you consider it was a loss of $200 billion in market cap. But in reality, those declines are mathematically similar.
I am sure everyone wants to know how low AAPL can go, but clairvoyance is not how you make money in the stock market. If bad news keeps coming out, and the stock refuses to fall further and stabilizes, it would mean that everything is priced in. Based on P/E and P/B multiples, shares are cheaper than they were at the major market bottom in March 2009.
As to Google, Android will likely remain the dominant system for smartphones because it is the breadth and depth of products available and how they are integrated in the operating system that counts. I do not like that Android devices have different interfaces — a major selling point to different manufacturers that customize them on their own — so the ease of use of iOS 6 is missing. Still, every smartphone manufacturer wants to be part of the mobile boom, and Android is a popular way to do it.
The No. 1 maker of Android phones, Samsung, also is trying to introduce a Tizen OS this year that competes with Android. It looks like Google’s takeover of Motorola Mobility has scared Samsung into thinking about diversifying, but one wonders if it has a shot. If Bada OS — Samsung’s previous smartphone OS attempt — didn’t work, why would Tizen fare any differently, given how far ahead Android is?
I think many more rabbits will jump out of Tim Cook’s hat — a bigger-screen iPhone, a Siri-integrated smart TV, watches and who know what else — in the next few years. There is $137 billion in cash on the balance sheet to invest in brilliant new ideas, and a stock that is trading at a P/E of 9.7.
The last thing in the world a sensible investor should do is count Apple out.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates hold positions in Apple and Microsoft mentioned in this article for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities. Investing in non-U.S. securities including ADRs involves significant risks, such as fluctuation of exchange rates, that may have adverse effects on the value of the security. Securities of some foreign companies may be less liquid and prices more volatile. Information regarding securities of non-U.S. issuers may be limited.