Apple seems to be doing well: it’s once again the most valuable U.S. company, with a stock-market value of around $945 billion and its shares trading around $200.
But if you dig a little deeper into Apple’s business, as I have, you will find plenty of reasons to worry. Below are seven red flags that suggest to me that Apple AAPL, -0.04% may, for the first time in over a decade, become a risky investment in the coming 12 to 24 months.
1. Apple’s market is saturated. While Apple controls an impressive 87% of the industry’s profit from smartphones while only selling 19% of units, demand for iPhones is shrinking. Shipments have fallen, and Apple has changed how it reports its numbers to mitigate these downward trends. Given both smaller incremental changes to devices and higher prices, people are holding on to their devices longer and/or moving to competitors’ devices. As iPhone drives such an important share of Apple’s profits, this is bad news.
2. Apple has stopped trying to be the best. This reminds me a lot of the Steve Ballmer era at Microsoft. Microsoft MSFT, +0.52% notably missed Mobile, Cloud, and Big Data because it was too focused on driving short-term profits for shareholders. (Satya Nadella has fixed this in less than half a decade.) Under Tim Cook, Apple has fallen into the same trap of no longer thinking of its users as its customers, and instead thinking of its investors as its customers. Innovation and design have become secondary considerations and it shows. Investors are important, but Apple’s long-term business is won and lost in the hearts of consumers, not on Wall Street.
3. Apple has an identity crisis. When Apple was a challenger brand, it disrupted. It innovated. It had to “think different” and be a rebel. The moment Apple became the incumbent, it lost its identity, its sense of purpose and its vision. That’s why Apple is trying to be everything now: a credit-card company, another Netflix, the Reader’s Digest of news (leading HSBC to downgrade the stock), maybe an AR company, maybe a car company… Worst of all, Apple keeps looking to the past for ideas instead of the future. Steve Jobs had vision. Tim Cook has spreadsheets. Spreadsheets don’t make great Apple products. Vision does.
4. Apple keeps missing the boat on innovation. Steve Jobs was a market-creator. His model was to build entirely new markets out of new product categories with potential. Apple’s success was predicated on a mix of calculated risk and impeccable timing. Today, Apple no longer seems able or willing to create new markets in which to grow. It should have been the smart home company, not Amazon or Google. It should already be the Mixed Reality (XR) company, but for all the rumors, Apple has yet to produce a revolutionary XR product leaving the likes of Microsoft, Facebook FB, +0.90% and Magic Leap to lead in this category.
5. Apple has fallen behind. On the phone side, Huawei and Samsung are reinventing the smartphone with foldable technology, 5G and a plethora of other advanced features. Meanwhile, iPhones still sport 2017 specs, and Apple will be at least a year behind Android device-makers in introducing 5G devices. There is even talk about Apple’s first 5G phone being delayed until 2021. On the computer side, PC makers are reinventing the laptop with Always Connected PCs (ACPCs), while MacBook improvements have been incremental at best (still no touchscreen?). All of Apple’s top competitors have VR products, and they’re already impressive. Meanwhile, Apple is still “working on it.” Even AI-wise Siri is among the least capable digital assistants in the market. Charging a very high premium for 10%-25% improvements to old product categories will only work for so long when everyone else is delivering exciting innovation to eager consumers.
6. Apple quality isn’t what it was. Steve Jobs was meticulous about making sure products were shipped only when perfect. Under Tim Cook, buggy products are allowed to make it out the door, requiring more software updates and in some cases hardware fixes. The MacBook keyboard problem remains unresolved. An article in Quartz asked whether Apple even cares about PC’s anymore. Consumers don’t want to pay for a premium experience, only to suffer the kinds of quality-control issues they were trying to get away from in the first place.
7. Apple has a growing trust problem. The list of Apple’s misdeeds in the last few years is sadly growing. It is accused of lying to customers, it steals intellectual property, it bullies suppliers, it hands over control of your screen to third-party apps. All that is making consumers skeptical, cynical and resentful toward Apple. This, too, can have a significant impact on consumers’ spending decisions. Trust matters in the age of Facebook.
Apple won’t crumble overnight, and the company is resilient, but core indicators of its success aren’t what they once were. If Apple only had one glaring problem, I wouldn’t be worried, but it has at least seven, not to mention the damage that could come from its ongoing litigation with Qualcomm QCOM, +1.88% and its shaky bet on China. Taken together, I believe they will lead to a slowdown for Apple, the start of which we are already seeing. This could mean lower profits and shareholder returns in the coming years, making the stock a riskier pick than it has been in a long time.
Daniel Newman is the principal analyst at Futurum Research. Follow him on Twitter @danielnewmanUV. Futurum Research, like all research and analyst firms, provides or has provided research, analysis, advising, and/or consulting to many high-tech companies in the tech and digital industries. The firm doesn’t hold any equity positions with any companies cited.
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