Are the risks to Apple's stock as serious as some investors think?

Are the risks to Apple's stock as serious as some investors think?

The equity research arm of Barclays just put out a report on Apple, and it has a handy chart summarizing all of the main concerns investors have with the stock right now.

The concerns are: 1) Long term operating margins; 2) competition for iPhone; 3) competition for iPad; 4) no “next big thing; 5) concerns over maps; 6) management changes; 7) production execution; 8) execution risks in vertical integration

Let’s dive into these a bit, shall we?

I think it’s safe to lump the first three items into the same category. The market is worried that iPad and iPhone competition (mainly Android) will hurt profit margins in the long run.

In the parts of the world where Apple is kicking ass the only real competition these days is Samsung. And I don’t think I need to remind you all that Samsung is not a discount vendor. Their average selling prices aren’t much lower than Apple’s. When carrier subsidies are taken into account, the price consumers pay are very reasonable. So I’d say the real risk to long term margins is whether or not carriers can continue to make money from iPhone and Samsung Galaxy subscribers. If wireless data margins take a hit, subsidies will drop and pricing pressure ensues.

Yes, there is some pressure coming from Google’s Nexus 4, and the Kindle Fire HD. But the volumes of these two products are really a drop in the bucket compared to what Samsung is selling. The Kindle Fire HD sure looks like a great tablet, but it’s essentially meaningless outside of the US, which accounts for a relatively small percentage of the global opportunity

What allows Apple to maintain its pricing power, as always, has been the beautiful integration and simplicity of hardware, OS, apps, media and services. Apple has maintained pricing power in the PC market for ages and they did it without the scale that they now have.

So why is everyone suddenly worried about profitability? Apple has all the same advantages they’ve always had, plus they are now huge. Their iOS market share in mobile computing makes Mac OS X market share (in PC land) look like a total failure.

Last quarter’s guidance of 36% gross margin has some investors concerned about profitability. But if you look back to their latest quarterly results the explanation Peter Oppenheimer gave is quite reasonable. Apple just threw the kitchen sink at us by refreshing pretty much everything they sell in a single quarter. The ramp-up effect on margins is something I’ve seen many times before at other companies. It isn’t Apple making up some kind of excuse.

The whole idea of Apple not having a “next big thing”? Honestly, how can people seriously make this kind of comment? When the iPhone was first announced, did anyone see it coming? And the iPad - yeah, people though a larger iPhone was coming but really, we had no idea just how big a deal it would be. So why, all of a sudden, does the whole world seem to believe they know what Apple won’t be doing?

What about the management changes? The loss of Steve Jobs is an obvious concern, and one that has been out there for more than a year now. Yet Apple has released some of its best products ever. I don’t think we’re going to know just how well (or poorly) Apple deals with his loss for a few more years.

The loss of their retail executive, John Browett, doesn’t bother me in the least. If he didn’t fit in with the Apple culture, they needed to cut him loose. This just doesn’t seem to have any long term implications to me.

So, besides Steve Jobs, I think the executive changes at Apple really boil down to the recent elimination of Scott Forstall. He was instrumental in the launch of iOS, but that was 5 years ago. Under his leadership, Apple has carved out a massive lead in the creation of the most powerful mobile computing ecosystem on the planet. I’d suggest that a leadership change, at this point, is less of a risk.

Finally, let’s talk about supply risks. Apple probably won’t make enough iPhone 5 to satisfy demand this quarter. Is this really anything new? I don’t think so. Apple has consistently pushed the limits on manufacturing techniques for its products. It has typically run into short-term shortages after a major release. Yet it has always caught up over a couple of quarters.

Apple is also shifting away from Samsung as a fab for its application processors. There are execution risks in making this happen, but it’s not like shooting at a target and hoping you hit. Apple doesn’t just stop making chips at the Samsung fab, move over to Taiwain’s TSMC, and pray for good yields. No. Apple has contracts in place with Samsung, and despite rumours of higher prices, I suspect they’ll have supply continuity until they complete their transition away from the Korean chipmaker. Remember that Samsung isn’t selling product to Apple.

They’re selling fabrication services. Apple owns the chip design.

Have something to say about this story? Share your comments below! Need help with something else? Submit your question!

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

Are the risks to Apple's stock as serious as some investors think?

13 Comments

Re: 'no "next big thing"'

It takes a lot of planning and infrastructure work before you can disrupt an industry and re-make it in your own image. And it's been less than 3 years since Apple's most recent "next big thing." (The iPad.) And, as we all know, Apple doesn't discuss future products.

So whatever Apple's "next big thing" is, it will take a long time to develop, and they won't announce it until it's ready. We suspect that Apple will continue to add features to Siri and iCloud for the next few years, without any major new product line(s). Until they have signed deals with TV content providers et al and can announce whatever they're working on in the TV space.

Re: "next big thing"'......that will be the next QTR results over 60Bio$ in revenue.. with over 30Mio iPhones and over 30Mio iPads sold... that's big enough for me

Ah, analyst talking points... when the poor schelp has to write something interesting because of pressure from the sales department.

to understand the sense... one have to read the whole flood of AAPL negative headlines in the past years, fabricated by some suckr analysts and column writers, all written because Hedge Funds are paying for negative headlines very good !!! ...If you would read any of the articles you'll find there is nothing, but just BS, nonsense and hot air... important is just the negative Headline...because it triggers a sell panic reaction... .the aim of this game are : all in the money Puts and dirt cheap Calls...or just business as usual ... read all of the AAPL negative articles a year ago ...two ... three.... and U'll find always the same pattern to it.. .But.. against all the odds in the past ...AAPL still marched all the way UP and generated more % return to its shareholders
than any other tech company in the world... and so they will in the future...U just have to accept that Hedge Wolfs will always...l bite a big chunk of it first...as there are top-tier PREDATORS on the top of the food chain ...

This is what apple wanted... They are on there little island to make a stand against the rest of the world. They wanted to be different and sue everyone else in the process. So I personally hope apple fails. but in the mean time... do us all a favor... change your charging port to a microusb like the rest of the world. Your dumb ports dont make you cool.

Hey... AndroTroll... U just hit the wrong button... DUDE...didn't ya... so crawl beck to Ur green garbage bin and enjoy the sweet waste

haha. did you think of that all by yourself? you know your precious company will fall. This is what happens when you play with fire. Dont take your rage out on me. "go crawl" in you precious apple store and see if they can fix those typing errors.

Sorry... DUDE... Ur problems can't be fixed... the only solution is euthanasia... APPLE would fall indeed if everyone would be a CHEAP-SKATE like U

Apple used to be a market leader and innovator... now they are NOT. So it's not suprise that their market value is dropping so mucn.

it's all about earnings of a dividend. if they consistently beat earnings, people will buy, the stock will go up. If not it will go down. The question is do you believe in the management to achieve that. Investors want consistent growth. If not they need a high dividend yield. If they don't see that they'll put there money somewhere else.

re: "Next Big Thing"...

The difference between now and before the iPad is that many analysts, and fans, can't seem to hone their senses on what could be next. That's how the stock market operates - future value of earnings. So, after the iPhone, we all priced in the expected next thing - the iPad. Now, with both of those products maturing and facing increasing competition, investors have a right to be worried. This will be the first time Apple will rely on a next BIG chapter not written by Steve Jobs. Apple has to prove something now. Everyone is watching....and waiting.

Exactly. After the iPhone, everyone was waiting on apple to create a tablet. It was heavily rumored to be their "next big thing". TV is the rumored "next big thing" but that's an already saturated market and doesn't hold the promise that a brand new product line holds. There is no clear winner in Apple's product line outside of their already great selling products (that are facing lots of competition).

re: "It has typically run into short-term shortages after a major release. Yet it has always caught up over a couple of quarters."

And therein lies the problem for 'Vegas'-speculator day-traders. They don't care about in a couple of quarters. Everything on the list (despite the use of 'long-term' terminology) is focused in the short-term effects. In other words, where am I on the wave and what will the wave do short term? They could care less (and are generally clueless) about Apple's long-term.

This is the problem with public companies these days. Outside idiots end up being the company rudder.