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Apple's (Nasdaq: AAPL  ) earnings report vastly exceeded even the most optimistic expectations. But the stock is trading at a P/E ratio of less than 16, suggesting that many investors don't believe a company with $100 billion in revenue can continue defying the law of large numbers. I think they're right … and the early warning signs are there for those who look.

The quarter's so bright, you gotta wear shades
Apple's revenue rose 82% year over year last quarter. EPS rose by an even more impressive 122%. How does a company with more than $100 billion in annual revenue deliver such stunning growth? It's working the "4Ps" of marketing, and working them quite well:

  • Product: Apple has the right products.
  • Price: Apple prices are reasonable. It's even pricing the iPad aggressively.
  • Promotion: Apple's compelling ads focus on what can be done with its products, rather than specs and prices, and are often humorous. And although normally retail locations fall under the fourth "P" of marketing, Place, Apple's stores can just as easily fall under Promotion. Apple broke new ground in retailing, and its stores are so successful that J.C. Penney recently hired Apple's retail chief as its new CEO.
  • Place: Apple is in the right market segments. And it's in many -- but not all -- of the right markets.

It's that last part that explains much of Apple's current ability to defy the law of large numbers. In many places, it's hard or impossible to buy Apple products. That's evident in Apple's growth strategy, outlined as follows in its most recent 10K:

  • Geographic expansion. Many of its most popular products have limited availability. For example, in September 2010 the iPad was available in only 26 countries. In contrast, the iPhone was available in 89 countries.
  • More mobile carriers. For example, expanding iPhone availability in France from one to three carriers helped grow market share from 3% to 11% there over two quarters. In China, Apple already does business with China Unicom and is widely expected to land China Telecom and mega-operator China Mobile with the iPhone 5.
  • More Apple Store retail locations. Retail sales increased 47% in fiscal 2010, driven by an average increase in per-store revenue of 30% and by the addition of 44 new stores. Still, this segment represented only 15% of Apple’s fiscal 2010 sales. As of September 2010, it had 317 retail stores, including 233 in the United States and 84 in 10 other countries. 
  • Growing its investment in marketing, sales, and advertising programs to increase product and brand awareness, sales through resellers, and sales in the Enterprise and Small-Medium Business segments.
  • A richer mix of offerings.

Growing pains
Who can forget AntennaGate? Apple insisted that antenna issues on the iPhone 4 were common among cell phones, but Consumer Reports disagreed. After testing the original AT&T (NYSE: T  ) iPhone 4, the Verizon (NYSE: VZ  ) version released earlier this year, and several other smartphones offered by the same carriers, Consumer Reports concluded, "the iPhone was the only phone affected by placing a finger around the outer band of the phone." What's more, Apple was advertising heavily to hire antenna engineers after the debacle, suggesting that it saw a need to strengthen its technical capabilities in this arena.

The impending end of MobileMe is further evidence that Apple's technology doesn't always "just work," as the company claims. I write from personal experience on this topic. MobileMe does fine syncing email and bookmarks among my devices, but it's a disaster when it comes to syncing contacts, calendars, notes, and documents. Hours and hours spent with Apple tech support and two free device replacements have not resolved these issues. Is it me? I synced multiple PCs and a Palm with Intellisync for many years with nary a hitch, so I'd like to think it isn't. Web forums confirm that I'm not alone.

Apple introduced MobileMe more than three years ago but still hasn't gotten it right. iCloud should have been the next generation of MobileMe. Instead, Apple is "firing" its MobileMe customers next year. iCloud won't offer several MobileMe features. That suggests that Apple realizes MobileMe is so troubled that it's better off just starting over.

This isn't only technology where Apple has faltered. The company has a well-deserved reputation for marketing savvy and great customer experiences. That makes its recently botched product-transition announcement on Final Cut Pro noteworthy. It's a sign that the company's culture and standards are slipping.

Foolish takeaway
It typically takes a while for problems to come back and haunt a computer company. For example, I heard complaints about the deterioration of Dell's (Nasdaq: DELL  ) tech support and product quality for two to three years before the company's financials began to deteriorate in 2005. And after swearing by Hewlett-Packard (NYSE: HPQ  ) printers for years, I bought one in early 2010 with problems that have never been resolved. More than a year after that purchase, HP's challenges became evident in its financials.

Apple's stock probably has several more good years ahead of it. But there are signs the company has started to lose its way under the weight of rapid growth. Investors would be well served to monitor these warnings. To help you keep an eye on your investments, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding these companies to your Watchlist now:

Fool contributor Cindy Johnson owns no shares in any security in this story. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of AT&T and Apple and creating a bull call spread position in Apple. 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 (23) | Recommend This Article (6)

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 30, 2011, at 11:39 AM, samkass wrote:

    MobileMe is the best calendar syncing solution I've ever used. I don't use it for much else, but that alone is worth the money to me. And with AntennaGate? It turns out Apple was right, as evidenced by the zillions of complaint-less iPhone 4's on the market.

    The bottom line on Apple isn't its quality. It always gets by far the highest marks on product quality and support. The question is one of saturation. They earned 66% of all the profits in the mobile phone industry last quarter, so Apple's growth is now closely tied to the overall industry's growth. Which is fine as long as the industry is growing, but when will it saturate, and will the iPad grow fast enough to keep the growth going?

  • Report this Comment On July 30, 2011, at 12:14 PM, PrudentDude80 wrote:

    What are the warning signs again?


    MobileMe fiascos?

    MFool has been panning AAPL for years predicting doom and gloom.

    Look at what happened with Antennae: it was acknowledge that there is an issue, they still sold all of the iPhone 4s they could make.

    IPhone has reached appliance status: it is like a refrigerator - something you can't do without.

  • Report this Comment On July 30, 2011, at 12:30 PM, skippywonder wrote:

    A valiant try to throw paint on a priceless piece of art (that's the opposite of putting lipstick on a pig, BTW).

    But what are the actual criticisms here? Antennagate? Please not that again.

    The author did not like MobileMe and had a bad experience with it, so getting rid of MobileMe is somehow a sign that Apple is going in the wrong direction(?)

    The author assumes that when Apple dumped its very tiny pro video market (which bought its $1000 product) for the huge and growing "pro-sumer" market (which will eagerly snatch up its $300 product) that this represented a mis-step. I think the author does not really understand their intent, here. They ditched the high end for a new paradigm. One that will initially appeal to the millions of folks who enjoy playing with iMovie but want more out of it. Video production for YouTube will vastly out sell video production for television. And this is somehow a sign that Apple is not going to grow?

    A glance at Cindy Johnson's earlier work on Apple will make it clear she strains to find the negative case. That's fine. We need good negative case building to make us stay focused on what works. But if Antennagate, the switch to iCloud and the conversion of Final Cut to a lower priced but higher selling product are the best cases against Apple, I'm more convinced than ever that this is the stock to be in ("early warning signs" notwithstanding).

  • Report this Comment On July 30, 2011, at 12:34 PM, daveshouston wrote:

    Geez, what a lightweight article.

    This is about like finding fault with the cup holders on a new model BMW and using that a a basis for predicting the company's downfall.

  • Report this Comment On July 30, 2011, at 12:58 PM, millsbob wrote:

    it's fashionable in these "fair and balanced" days to insist that all points of view be represented: logical, researched, scientific... or not so much.

    but fashion is often divorced from reality.

    and articles like this just add to the noise pollution that is bringing the value of TMF's articles down as the numbers of said articles increase.

  • Report this Comment On July 30, 2011, at 1:03 PM, skippywonder wrote:

    Cindy Johnson asks on June 10, 2011 "Is Apple's Spaceship a Sell Signal?"

    AAPL June 10 = $325.90

    AAPL July 29 = $390.48

    I'm gonna go with, "No."

  • Report this Comment On July 30, 2011, at 1:07 PM, gslusher wrote:

    Re: New Final Cut Pro

    The author might benefit from reading David Pogue's article. He shows that some of the criticism is based upon the product being DIFFERENT from the previous versions. Some of the "missing" features are there, but in a different form, for example. Other bits will be added by Apple over time, probably the next 6-12 months.

    Some of the pro video editors complaining sound like whining children. One would think that their current version of FCP stopped working the instant the new version was released. If they don't like the new version, they should just keep using the older version they have.

    The "prosumer" market is probably much, much larger than the "pro" market.

  • Report this Comment On July 30, 2011, at 2:04 PM, Runner73 wrote:

    I think Apple is going to dominate the world like never before. Last time I read an article, where was mentioned that Apple doesn't invest any item, but is re-inventing them; they do it better!

    The walkman for an Ipod, Iphone and Ipad. There qualitiy en sensation is so high, people are willing to pay more for it.

    What;s next? A television? A Ipad, but then in big, connected to internet, and able to have video conference calls, with touchscreen? What ever they invent, it will be big and better than the rest and a worry for HP, Dell, Microsoft, Ninendo, and others.

    We will see what happens in 10 years.

  • Report this Comment On July 30, 2011, at 2:26 PM, marv08 wrote:

    A meaningful article would not discuss the x16 P/E without mentioning Apple's zero debt, and cash (and equivalents) exceeding that of the US. If you consider these, Apple is a steal. The factors holding the stock back are psychological. Apple, in some minds, is still a niche company. And considering how much profit and revenue share they have in each market when compared to market share, this is not at all far-fetched.

    What is overlooked is, that they occupy the valuable part of the market in each segment ("computers over $1k" is owned by Apple, "phones making any money worth talking about" is owned by Apple, "MP3 players making money" is owned by Apple, "set-top boxes having more sales than returns" is owned by Apple, "media and software stores with paying customers" is owned by Apple, and, finally, "tablets" - without any further qualification - is owned by Apple).

    I had all iPhones from 1 to 4 and never had a single dropped call (I am not in the US and not on AT&T though) and the iPhone 4 provides good call quality in places (like my underground garage) where previous phones did not even have a signal to begin with. So, Antennagate my behind. Approx. 60-70% of my company's revenue comes from video production, and Final Cut X is the best thing I have seen. It is certainly not complete yet, and professional users must evaluate, if they can embrace it, or better hold out for the next major version, but an unprofessional or consumer product it is not at all. Give it one or two years (based on the development pace of the revamped iMovie) and it will eat Avid's and Adobe's lunch.

    Maybe write some articles about things you do comprehend.

  • Report this Comment On July 30, 2011, at 2:30 PM, H3D wrote:

    "the iPhone was the only phone affected by placing a finger around the outer band of the phone."

    In fact it was the only phone with an outer band!

    You must be pretty thick to spend so much time trying and failing to sync documents on MobileMe. It doesn't, and was never claimed to, sync documents.


    The MobileMe launch fiasco was 2 years ago plus.

    The iPhone 4 antennae non issue was 1 year ago and the phone remains, 12 months later, the worlds best selling smartphone by a significant margin.

    In that 12 months Apple have flourished.

    Apple's smart phones deliver twice the profit of all other smartphones and dumb phones combined.

    Who needs to look for signs? Just follow the star.

  • Report this Comment On July 30, 2011, at 2:32 PM, kramsigenak wrote:

    Sorry Cindy,

    This article does not resonate:

    You can bad-mouth the best company in the world for not being perfect (has there ever been a perfect company?), but it's still the best company in the world.

    Antenna-gate? C'mon

    MobileMe? Who cares? They're reinventing the wheel with iCloud.

    FinalCutPro? Yeah, all of us iPhone, iPad, iPod buyers really care... and what percentage of iMac buyers do you think will return their iMac because FinalCutPro changed?

    Sorry this was a weak effort to try and tear down Apple.

  • Report this Comment On July 30, 2011, at 3:06 PM, pmj98765 wrote:

    BAMMMMMMMMMMM!!!!!!!!!!!!!!!!!!!! Just got hit by the Ipad freight train. Total game changer also in it's infancy. No Growth? Warning signs? Yeah I will keep an eye out for those. The only warning signs to me if they do not penetrate the Enterprise business of RIM then may be the stock will only go to $750 instead of $1,000.

    I read your article 3 times thinking maybe I missed something. Your point is that mobile me was a failed product. I admit it could have been better and more user freindly however this is such miniscule part of their business and this is something they will improve on as iCloud should cannabilze Mobile Me.

    You heard complaints about Tech support and product quality issues with Dell and HP. No product quality issues that are meaningful with Apple and when they do have an issue there support is temendous. I like Apple because they put out a quality product and their support is the best.

    In the infamous words of John McEnroe "You can't be serious"

  • Report this Comment On July 30, 2011, at 3:18 PM, dstb wrote:

    Their new HQ is the warning sign to sell? And what else? Yes I know things like a fancy new office were mentioned by Peter Lynch but when everything else is working in their favor it's a little ridiculous to even mention as a problem. It also goes with Apple's expert marketing of their image.

    You guys should try to think a little more before you publish an article. I love some of the MF pay services but I've "almost" gotten to the point of totally ignoring these articles because many are worthless. Get back to us when you see a real operating problem with Apple.

  • Report this Comment On July 30, 2011, at 3:19 PM, m3kw wrote:

    uh oh. Apocolypse now!!

  • Report this Comment On July 30, 2011, at 3:46 PM, skippywonder wrote:

    Apple Eclipse Now

  • Report this Comment On July 30, 2011, at 4:18 PM, ConstableOdo wrote:

    Let me be the first to say. "Apple is doomed." The larger and more wealthier the company gets, the sooner Apple reaches the edge of self-destruction. Any day now, Apple will simply self-implode and disappear while Netflix motors on to reach a share price of $500. This is mere common sense. Companies that bring in huge revenue and profits with huge cash reserves are always the first to fall.

  • Report this Comment On July 30, 2011, at 4:46 PM, cal91 wrote:

    As an investor I am always looking for information that will help me make decisions about whether to keep a stock or sale. This article did nothing to dissuade me from holding on to Apple for the foreseeable future. If this is the best case you can make for selling, I'm staying put.

    It's interesting to note that even you say that Apple's stock probably has several more good years ahead of it. So what's your point? That Apple can't continue at it's current pace forever? Of course it can't. But you've made no case at all that Apple's demise is going to happen anytime soon. In the meantime, I'm feeling pretty good about my investment. I can't even give you points for effort.

  • Report this Comment On July 30, 2011, at 5:47 PM, bsimpsen wrote:

    If the warning signs are your misunderstanding of the facts, color me unworried.

    If the iPhone antenna was truly inferior, why have several carriers recommended it for use in their fringe/rural coverage areas? Why are the dropped call statistics for the iPhone 4 among the best out there, and better than the iPhone 3?

    If past failures are somehow indicative of future performance, the Lisa must scare the hell out of you.

  • Report this Comment On July 30, 2011, at 6:19 PM, pk22901 wrote:


    Whoever chose your title really killed your rep.

    "Don't Miss These Early Warning Signs on Apple"

    How about "Apple's Mistakes"? Much better.

    I agree with the errors you point to, but they don't imply avoiding the investment.

    Better luck on your title next time.

  • Report this Comment On July 30, 2011, at 7:55 PM, michaelnofool wrote:

    Another negative article on AAPL from Cindy this year........

    another waste of my time !

    I guess you are hungry for attention ?

    or there is a financial agenda behind this ?

    who is paying you Cindy ?

  • Report this Comment On July 30, 2011, at 11:32 PM, beetlebug62 wrote:

    "Is it me?"

    Yep, it's you. You should know enough to know not to use anecdotal evidence.

    Using Consumer Reports to validate anything is very weak, considering that most responsible journalists disagreed with their assessment. The best tech sites, like Anandtech, disagreed with CR as well.

    "It's a sign that the company's culture and standards are slipping."

    LOL! Using FCP X as a sign of Apple's doom is right up there with your conclusion that Apple building a 4-story HQ is the sign of the apocalypse. What's next?

    I've been warned to heed your warnings! Having read your last two postings on Apple, I think you're slipping, because anecdotally, the last time someone I know made two ridiculous comments about Apple, they slipped!

  • Report this Comment On July 31, 2011, at 6:11 AM, fauxscot wrote:

    Content free article alert.

    For those reading, this is another (and increasingly tired) attempt to generate readership by using AAPL in the story.

    Not sure what you do for a living, Cindy, but I suggest taking up financial research would be a good start on a career.

    Your posts now on my personal "ignore" list.

  • Report this Comment On July 31, 2011, at 12:26 PM, Davewrite wrote:

    "Antennagate" ??

    if there was really 'antennagate' how did iPhone rank Number One on JD Power's Customer Satisfaction Rankings (a poll of thousands of ACTUAL USERS and not the nonsense 'tests' used by Apple haters) beating out every other phone they tested (Motorola, HTC, Rim etc)?

    why is the iPhone 4 return rate 1.6% (actual number from Apple) vs the recently reported 30-40% of some Android phones?

    Won't even bother to comment on the rest of the mis-information put out here as others have gone through them.

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