Is Apple Headed for a Lost Decade?

For more than ten years, Apple's (Nasdaq: AAPL) stock has been heading to the stratosphere. The company revolutionized music, redefined the cell phone, and virtually invented the tablet market, leading to incredible profits for investors.

We've seen similar revolutionary companies with successful businesses and stock prices in the past. The one commonality is that they all, eventually, cease to become the darlings they once were. The phenomenon is two-fold. People don't blindly support the top dog for long, and competition takes aim at successful businesses, which limits upside and profit margins. There's a good chance Apple will head the way of many successful companies a decade ago: toward a lost decade.

Questioning Apple's practices
Until now, most people have blindly marveled at Apple's dominance in the smartphone and other markets because the few flaws the company has shown didn't seem to gain traction with the media. That narrative may be changing now that Apple's manufacturing practices are coming under increased scrutiny. The New York Times ran such a damning article last week that CEO Tim Cook felt the need to respond personally.

Whether or not allegedly poor work conditions at Apple supplier Foxconn are true isn't something I can comment on directly. What it does point out is the increased scrutiny on Apple, and which it will continue to come under as an industry giant with such a consumer base. We saw this when Nike rose to sneaker dominance. When people started to investigate the companies Nike used to outsource production around the world, some consumers began to think about sweatshop workers when buying Nike shoes.

Consumers often eventually turn on a brand when it becomes "too popular." These kinds of investigations can be the catalyst that drives consumers to question their allegiance to Apple.

Competition getting fierce
The biggest difference between Apple ten years ago and Apple today is the bull's-eye now on the company's back. A decade ago, the Mac was a computer reserved mostly for graphic designers and K-12 students. The iPod was a cute new music invention that had yet to really show that it would disrupt the entire music industry.

Now, Apple is a dominant player in smartphones, music, tablets, and has a growing presence in the PC market. The copycats and legitimate competitors are seeing the markets Apple has built as areas they can grow into as well.

Google (Nasdaq: GOOG) has been extremely successful moving into the smartphone business. It can also be argued that some of the phones run on Google's Android platform are better than the iPhone. The Samsung Galaxy X2 took just five months to hit 10 million in unit sales, and the competition to top Apple in the tablet market is coming on strong as well.

Amazon's (Nasdaq: AMZN) Kindle device is starting to make major inroads against the Apple iPad at a lower price point. Analysts estimate 5.5 million to 6 million in Kindle sales during the fourth quarter, and estimate that Android holds around 40% of the nascent market's operating system share.

The bottom line is that competition in Apple's core products will only get stronger. No one can match the quality, ease of use, and interconnection between these devices today, giving Apple a great competitive advantage, but the tech market adapts quickly and the switching costs will be relatively low for consumers in the future.

Law of giant numbers
The biggest thing that keeps me from being overly bullish on Apple's stock is a feeling that I've seen this before. I've seen companies reach such a level of size and success that it appeared no one could challenge them.

But eventually companies that obtain this size and success see their growth slow as they struggle to maintain current product lines and expand into new ones. While it seemed easy to take Apple from a single computer product line to a company with three major product lines (Macs, iPhones, iPads), expanding to six or ten major product lines will be much more difficult.

Microsoft (Nasdaq: MSFT) was in this position a decade ago. It dominated the PC landscape, introduced new innovative products, and was piling up profits for investors. A decade later the company is still highly profitable, but the market doesn't "ooh" and "aah" at its products anymore -- and neither do customers.

The same can be said for Dell (Nasdaq: DELL) and Best Buy (NYSE: BBY), who upended their industries in their own ways. Dell cut the middle man out of the computer supply chain and Best Buy brought gadgets to the world. Their success in the '90s, however, was followed by a lost decade in the 2000s as competitors caught up, expansion became harder, and they failed to impress investors. Too often, a successful decade is followed by a decade of marginal returns, as these three companies below saw for themselves.

Source: Yahoo! Finance

As a comparison, in the last ten years Apple has provided shareholders with a 44.1% annual return, tellingly similar to the comparison companies above.

Something to think about
None of this is to suggest that Apple will not be a major tech player in another ten years, or even not a successful stock to own. But history has shown that companies hit a wall at a certain point in their development. After remaking the music business, smartphones, and tablets, I wonder if that time could be now for Apple. 

Agree or disagree? Leave your thoughts in our comments section below. Or, if you want to find out who our analysts think will cash while Apple and Google fight for smartphone and tablet market share then check out our free report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution." The report is free -- but only while it lasts.