Despite its massive scale, Apple Inc. (NASDAQ:AAPL) continues to find growth. During the latest quarter, revenues jumped by 13% to $88.29 billion and AAPL’s earnings increased by 12% to $20.07 billion. But, as positive as this may be, the long-term story for Apple stock is murkier than some investors think.
A key part of Apple stock’s growth story is the company’s transition to services. It certainly helps that AAPL has a base of 1.3 billion active devices and a powerful ecosystem of partners, developers and retail locations. Last year, the services business generated revenues of $31.15 billion, which came from a diverse source of categories like subscriptions, music, video, the iCloud, advertising and in-app purchases.
But Apple stock should also get a nice boost from the recently enacted tax reform law. In fact, the company has plans to become cash neutral. This means there will be juicy increases in buybacks of AAPL stock and dividends. There may also be more buyouts.
All this sounds great; however, investors should remember that there are still some nagging risks to AAPL as well. And these factors could make it tougher for Apple stock to generate market-beating returns over the next few years.
Three Long-Term Risks for Apple Stock
With that in mind, investors should consider the following long-term risks AAPL may face in the months ahead:
Secular Trends In the Smartphone Market
It’s no surprise: The smartphone market is maturing. And that should have Apple stock investors worried.
Based on research from IDC, the smartphone market suffered its first-ever drop in shipments last year, falling by less than 1% to 1.472 billion. Another notable ding to the market’s long-term health is the fact that people are upgrading less frequently and consumers appear to be resisting higher prices for smartphone devices. AAPL is clearly vulnerable to this as no one can forget the mind-numbing iPhone X price — a hefty $1,000.
According to IDC’s Anthony Scarsella: “Even though we have seen new full-screen displays, advanced biometrics, and improved artificial intelligence, the new and higher price points could be outweighing the benefits of having the latest and greatest device in hand.”Following this trend, AAPL suffered a 1% decline in shipments during the most recent quarter, falling to 77.3 million. This number was short of Wall Street expectations for a much more robust 80 million.
When you consider all of these factors, there are few signs that there is a supercycle with the iPhone.
One of the big advantages of Apple stock is that the company has a premium brand behind it. But competitors are making some inroads. And much of this is happening in Asia, with competitors like Xiaomi, Vivo, Oppo and Huawei stealing market share from AAPL.
While these companies have copied various high-end features of Apple products, they have also demonstrated significant innovation. The result is that more consumers are beginning to prefer their devices, especially since the price points are more compelling.
The growing competition has corroded AAPL’s market share in Asia. In fact, during the past three years, its market share in China has declined 5%, falling from 13% to just 8%. And the fact that AAPL only has a 2% share in India and 1% in Indonesia only manages to add salt to the already sizable wound.
Lackluster Innovation and Delays
One of the keys to Apple stock’s long-lasting success has been the company’s focus on innovation. And there’s no doubt that Steve Jobs was the mastermind behind its forward-thinking ways. But, even as the company continues to spend huge sums on research and development, AAPL has been lagging over the past few years with Tim Cook at the reigns.
While the iPhone X has solid features, the fact remains that demand has been tepid. Part of this may be the pricing. But it’s also a stretch to say that the iPhone X is a “must-have” device.
Another issue is that AAPL has suffered many delays in its product launches. For example, the iPhone X launch was pushed out by six weeks and the HomePod missed the holiday season. There were also delays with the AirPods
The situation with the HomePod delay may be the most alarming, since Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) have taken major leads in the market, with millions of units shipped for each of their products.
Even worse, the HomePod is far from a great offering. According to Consumer Reports, the device’s sound quality does not stand up to the quality of the Google Home Max and the Sonos One. This is particularly troubling for Apple stock since the company had ample time to come up with a great product.
Something else: It appears that the artificial intelligence capabilities are also sub-par, as the HomePod relies on Siri.
AAPL does have the resources and engineering talent to improve things, but given the intense competitive environment, the company really needs to act with much more urgency.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.