3 Challenges Facing Apple on the Way to a $1 Trillion Value

Investors in Apple (Nasdaq: AAPL  ) have been on quite a ride for more than a decade. The company has turned from a niche player in the computer business to a force in mobile phones, music, and the new tablet market. Apple is no longer the small company it was 10 years ago; it's a $325 billion market-cap giant.

So now that Apple is bigger than tech heavyweights Intel (Nasdaq: INTC  ) and Google (Nasdaq: GOOG  ) combined, can it keep rewarding shareholders by growing to a $1 trillion market cap? Here are a few of the forces Apple will have to overcome to get there.

The curse of Goliath
When you're the biggest, most successful company in an industry, you run one common problem: Everyone is gunning for you.

For Macs, competition is nothing new. Apple has been competing with Microsoft (Nasdaq: MSFT  ) and PC makers including Dell and IBM for years, and that isn’t about to change. But in newer products such as smartphones and tablets, where Apple revolutionized the market, the challenge is different. The target on its back is bigger, and competitors are starting to make inroads. Google's Android platform has more users than Apple's iOS, and form factors are starting to improve in both smartphones and tablets.

When the iPhone came out, it was the only device of its kind. Now HTC, Samsung, and Motorola Mobility (NYSE: MMI  ) , among others, have quality devices that are often less expensive. The iPhone is still a dominant product, but the pressure is on.

The tablet market may be even worse. Apple has to compete with niche devices such as Amazon.com's (Nasdaq: AMZN  ) Kindle and the Barnes & Noble (NYSE: BKS  ) Nook, which are designed for reading books. The Motorola Xoom and Hewlett-Packard Slate are among the tablet devices that provide a comparable experience to the iPad in what is becoming a very competitive market.

Apple is also fighting the same open/closed challenge in its products today that it did in the 1980s. Google's Android platform is open-source, allowing hardware developers to modify as they please and opening a world of possible competitors to Apple.

It's tough being on top.

The market falls out of love
Just ask Intel and Microsoft whether they feel undervalued by the market after being darlings in the '80s and '90s. Both have extremely strong market positions and tons of cash, and they still haven't been able to get their stocks to move in the past five years.

When you become one of the biggest companies in the world, you just can't command the same earnings multiple, and everyone starts pointing out any warts you may have. When it starts seeing the competitors you've attracted and notices that growth doesn't come nearly as easily, the market decides it may be time to move on.

Growth isn't easy to come by
One of the reasons Apple is so remarkable has been its rate of growth, even as a huge company. Over the past year, revenue has grown at an astonishing 71%, though you would assume that kind of performance couldn't last forever.

When Apple added the iPhone, the Mac and iPod dominated its sales. Since then, the iPod has taken a back seat, the iPad has been added, and the iPhone has become Apple's bread and butter. But where do you go from here? The iPhone is in at least 102 countries, Macs are growing share but aren't designed to dominate the PC market the way Windows does, and the iPad has competition left and right.

Apple's premium products are attacked from all angles, and while I've argued that Apple shouldn't make dumbed-down products, that also means leaving room for competitors.

Product risk has been a plus for Apple, but it could prove to be a minus in the future. If you don't hit a home run every time, it's tough when you really only have five product lines (iPod, iPhone, Mac, iPad, iTunes) that contribute significantly to sales. If a company can come up with a wildly superior product, it could put a major dent in Apple and, in turn, Apple shareholders.

Foolish bottom line
I'm not trying to rain on the Apple parade or discount its products. I'm writing this article on a Mac, I use my iPhone constantly, and I wouldn't give either one up. But there are challenges for Apple's stock going forward. The jump from a $100 billion company to a $300 billion one looked like a breeze, but can it make the jump to a $1 trillion company? That may take a lot longer.

Fool contributor Travis Hoium has no position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of IBM, Microsoft, Intel, Google, and Apple and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Apple, Google, Amazon.com, and Microsoft, creating a bull call spread position in Apple and creating diagonal call positions in Microsoft and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 07, 2011, at 7:52 PM, tttttttttzzzz wrote:

    the BIGGEST problem of Apple is "IMITATION".

    it's just not right, how other companies imitate the genius of apple.

    just take a look at "amazon appstore", that's just beyond ridiculous.

    how can u dominate the market, if all the other players just imitate your products, even copyin' the names. just gimme a break.

  • Report this Comment On July 07, 2011, at 7:56 PM, bsimpsen wrote:

    " The Motorola Xoom and Hewlett-Packard Slate are among the tablet devices that provide a comparable experience to the iPad in what is becoming a very competitive market."

    This has not been the opinion of reviewers, and the marketplace statistics indicate that in the first half of 2011, the market became LESS competitive as the Xoom and Galaxy Tap products failed to sell. The future may look different but you have wrongly characterized the present.

  • Report this Comment On July 07, 2011, at 7:58 PM, DefunctAcct wrote:

    It is a given that all leaders eventually fall off the pace. With that said and until that happens, let us examine what this article proposes.

    Curse of Goliath

    1. Do Kindle, Nook, Galaxy, Xoom provide anything like iLife and iWork suite of tools? As in editing photos, movies, writing documents that are usable on Mac's?

    2. Do Kindle and Nook offer high quality SDK for app development?

    3. Do they all come with a large volume of consumable media including music, videos, podcasts, books, presentations?

    4. Do Kindle and Nook do any sort of work flow synchronization like that promised by iCloud? Do Android devices?

    5. Do Kindle and Nook have any sort of capabilities in integrating seamlessly with Macs and PCs in terms of workflow? Do Android devices?

    Market Falls Out of Love

    1. MSFT went through its boom when the world was still new to PC and consumers were still learning what is DOS versus Windows and why should there be UNIX and Mac OS. Since then, MSFT has saturated the market and living off updates and upgrades. How is that comparable to AAPL today?

    2. INTEL is a chip company, when it was young and the world needed its chips, its growth was spectacular and went through a deserving period of appreciation. Now INTEL is just a chip company. It is a "value" stock. HOw is that comparable to AAPL today?

    3. Apple, unlike MSFT and INTC, is the first to make a successful tablet machine. It is the first to push seamless consumer integration of software and hardware. It is the first to push consumer IT using iCloud. Yes, others have "talked" and "tried" but they have not the reach of Apple into the mindshare of consumers. Why is that the similar to MSFT and INTC in their current mature stage?

    When MSFT comes up with something innovative and revolutionary in addressing real world consumer level problems, I am sure it will begin to excite investors. Same for INTC.

    GROWTH IS TOUGHT TO COME BY

    True, but is it over now? No more growth for the next quarter? Two quarters? THree? When?

    CONCLUSION

    This article states claims that are vague and hypothetical. All leaders eventually will fall prey to a better and younger leader, that is a given. Investors need to be ever aware of factors that precede a slow-down in growth. I am not sure how all that has anything to do with what is happening now with AAPL.

  • Report this Comment On July 07, 2011, at 8:02 PM, irast wrote:

    Interesting article, but the 800 lb gorilla in the room that you did not mention at all is the the eco-system aka the app store. No one has been able to touch it, and they just announced 15 BILLION downloads. That's with a B!!!!!

    It's not just the products, it's not just the innovation, it's the eco system, and now iCloud. That is what will take Apple to greater heights. $1 Trillion, that's a pretty lofty number, but Apple is still not even close to saturation in many many markets for phones, ipads and who knows what product is next.

  • Report this Comment On July 07, 2011, at 9:02 PM, FoolishNerd wrote:

    Thank you silivalley for taking the time to take apart the superficial arguments given in the article. I agree with all of your points.

    It seems to me that there are too many tech journalists who have deadlines to meet and writing articles like this pays their bills but they don't contribute any novel or useful analysis for the investor.

  • Report this Comment On July 07, 2011, at 9:09 PM, xmmj wrote:

    @ sillivalley

    WELL SAID!

    @ author

    Yes -these are headwinds, but the potential for growth is still phenomenal. Macs can continue their rate of growth for several years to come. The iPhone/iPad lines wil also grow for at least a couple of years.

    There may or may not be any radically new products coming, yet apple will not stop innovating, it will continue to dominate the high end (read high profit margin) segment of its markets.

    So what if Android phones are in more pockets, iPhone is still far and away the best, most popular, most profitable smartphone out there.

    The problem with tech writers is they think in MSFT terms - you are successful only if you are the monopoly. Apple thinks differently.

    Yeah - it will be a struggle to get to $1T. But they will get there.

  • Report this Comment On July 07, 2011, at 10:03 PM, taddles wrote:

    Apple will be eclipsed one day but for the moment they are a step ahead.

    I don't think cloud will help Apple because their consumers are not so corporate.

    A tsunami of competition will arrive for every widget Apple makes. What new field will they enter? What new device can they invent? What happened to Apple TV? And the dishwasher, where?

  • Report this Comment On July 08, 2011, at 12:18 AM, bbrriilliiaanntt wrote:

    Aapl is still a small player in all it's markets, except iPod of course. The markets it are in are trillion $ markets when combined. Phones , macs, iPads, media, iTunes, apple tv. Mart had a 90+% market share of os and office suites, it already owned the market, completely different with aapl, $1t by 2015. -Craig, go with ATM options Jan-2013's...shhhhh!

  • Report this Comment On July 08, 2011, at 9:03 AM, Onigato wrote:

    silivalley,

    Your argument is valid, to an extent. Yes Apple has many bells and whistles, especially in the tablet market which make it superior to either the Kindle or Nook, but neither the Kindle nor the Nook are toted as work-horse devices. That's like comparing Apples (pun intended) to pomegranetes. They aren't even marketed as aything BUT readers. There isn't any comparison at all.

    As for the Android devices, the tablet lines already have the "Cloud," and my Android smartphone could have the ability to do so if I *ahem* "got the app for that." I don't right now, simply because I prefer to see entire pages while working, and six square inches just doesn't allow that.

    Apple IS in a similar place where Mr. Softy was in the late 90's. Worse place really, when you think about it. Just because they got their big hit tablet out first (Apple was NOT the first to put a touchscreen tablet out, they were just the most successful thus far) does not translate to them keeping everybody else out of the major markets. They have the market share for now, but there are several competitiors moving up. Google, Amazon (yes, Amazon), Mr. Softy himself, RIM, even telcomms are starting to compete directly with the largest

    Apple WON'T be able to sustain the levels of growth they have been enjoying since the iPod debuted. It just isn't sustainable. I realize there is excitment about the iPhone 5, and then the iPhone 6 (Seriously? The 5 isn't out yet and there's discussion about the 6? Crazy.) but the market saturation is just about reached. If you don't have SOME sort of smartphone, you probably 1) don't want one, 2) don't have the money for one, or 3) have been living under a rock for the last ten years.

    Apple has their fan-boys/girls, and I'll admit, I'm not one of them, but even the hardest dyed-in-the-wool fan needs to realize that Apple's about to hit the wall. Not this quarter, not next quarter, probably not even inside of a year, but $1T market Cap? Never. I figure they will top out $500B, but not much more than that.

  • Report this Comment On July 11, 2011, at 4:28 AM, lowmaple wrote:

    The Trillion will be after 2015. Don't count out the new ideas and gadjets from appl just yet.

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