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Apple's Worst Nightmare

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Opportunists must be drooling.

Apple (Nasdaq: AAPL  ) has fallen in back-to-back weeks. The world's most valuable tech company surrendered 4.5% of its value two weeks ago, followed by an even crueler 5.3% slide last week. The stock is trading 11% below the all-time high it established earlier this month.

That's Exhibit A.

Then we have Apple's upcoming fiscal second-quarter report. The iEverything company reports after Tuesday's close. Apple rarely misses. That's Exhibit B. There are times when the stock has sold off after a blowout quarter, but that's typically when Apple's stock has run up ahead of the report in anticipation of a monster showing.

Exhibit A is on a collision course with Exhibit B, and the end result for Apple fans is Exhibit C -- I told you so.

Beyond Wednesday's likely pop
We know that Apple sold a ton of the new iPads it introduced last month. The sequential comparison will get hard for the iPhone -- pitted against the iPhone 4S introduction during Apple's holiday quarter -- but it will clearly be a lot more smartphones than it handed over a year earlier.

Bears would be nuts to argue that Apple is in for a soft quarter. It's equally as insane to argue that Apple -- now fetching a mere 12.9 times this fiscal year's projected profitability and just 11.3 times next year's forecast -- is somehow expensive.

However, there's also a reason analysts see revenue growth slowing from a hearty 49% clip this year to a more modest 19% uptick in fiscal 2013.

Apple is rolling right now, but there are a few question marks about its future.

Barbarians at the iGate
Five years ago, Apple was all about Macs and iPods. That accounted for just $11.2 billion -- or 24% -- of the $46.3 billion that the class act of Cupertino rang up during this fiscal year's freshman quarter. Macs are gaining market share, but at lower average selling prices over the past year in an industry that's been generally flattish lately. It's been even harder for iPods, as Apple's once iconic line of portable gadgetry has been posting year-over-year declines for more than a year.

This leads us to the glitzier world of iPads and iPhones. Unit sales more than doubled in both categories during the holiday quarter, and iPads and iPhones combine for nearly three-quarters of Apple's revenue.

If anything should derail either of these chugging locomotives, Apple would be vulnerable. It doesn't seem possible, but let's eyeball one scenario.

Microsoft's (Nasdaq: MSFT  ) clawing back into favor. The poster child of The Lost Decade isn't necessarily on fire right now. Revenue climbed a mere 6% in its latest quarter. Investors are simply starting to grow excited about the prospects of Windows 8.

As the software giant's first PC operating system developed with tablets in mind, Windows 8 will breathe new life into Windows watchers. Laptops with detachable screens that transform into touchscreen tablets are a safe bet to be the hot sellers of 2013. Instead of the Android and iOS tablets that are being used primarily for surfing the Web and streaming media, Windows 8 tablets will raise the bar on productivity with seamless Microsoft Office integration.

Apple has educated the market on the joys of owning a tablet. What if Microsoft's lesson is that tablets aren't just toys or classroom e-readers?

Partners are rebelling
Apple isn't the top dog in smartphones. Android is the global leader -- and growing. Bulls will argue that Google's (Nasdaq: GOOG  ) market leadership with its open-source platform doesn't matter. Apple is the one commanding the lion's share of the industry's profitability.

That is certainly true, but it also comes at a price.

RadioShack (NYSE: RSH  ) also reports quarterly results Tuesday. Analysts see the small-box retailer earning just $0.05 a share, a sixth of what it earned a year earlier. Why are margins getting crushed here? RadioShack blamed it on certain smartphones during a horrendous holiday quarter.

The company didn't call out Apple specifically, but wireless carriers are tiring of having to take a roughly $400 hit on every subsidized iPhone that they sell. Sure, they can make that back on two-year contracts, but it's a far more lucrative deal for carriers with cheaper smartphones. It also seems as if iPhone owners are quick to upgrade after the two-year pacts run out, forcing carriers to repeat the subsidized process.

Verizon (NYSE: VZ  ) , the country's largest wireless carrier, seems to have had enough.

"It is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft," Verizon Wireless CFO Fran Shammo said during last week's call.

As BlackBerry devices fade in popularity, carriers are hoping that cheap Androids and functional Windows Phone handsets eat into the iPhones. It's not about favorites. It's about what's best for their bottom lines. With Microsoft also giving developers a thicker slice of app sales, the application coders who put Apple's App Store on the map and gravitated to Android when it became the mass-market leader are also secretly rooting for Microsoft to matter.

The one thing the bears are missing
The grim scenario isn't pretty for Apple. The tech bellwether will have to either sacrifice margins by cutting prices or relinquish market share.

Proud bulls will argue that Apple is better off taking the high road. Apple is, after all, a premium brand. However, what happens as developers flock to the larger Android audiences and the meatier revenue-sharing potential of Windows? Apple's been there, you know. That was Apple in the 1990s.

However, what the bears are forgetting is that Apple innovates. It swings from vine to vine as if it's the Tarzan of innovation, giving us the iPod in 2001, the iPhone in 2007, and the iPad in 2010. It's a safe bet that the iTV will come in 2012 or 2013. Good luck guessing where Apple will go next. As opportunities dry up, Apple will be there to carve out new ones. That's not misplaced optimism. Just as Macs and iPods went from being essentially all of Apple's business five years ago to less than a quarter of the revenue mix today, why can't iPhones and iPads be replaced by something even better to the point where they are making up just 24% of the tech star's business?

Apple will be challenged later this year by Microsoft. Don't laugh. It's really going to happen, even if it's not evident for another year or two. In the end, Apple will find a way to excel. Apple will wake up from its nightmare, rub its eyes, and start working on a new dream.

Apple jacks
The next trillion-dollar revolution will be in mobile, but the best investing play isn't necessarily Apple. If you want to cash in on the upcoming trend, a new report will get you up to speed. Yes, it's as free as this article, but it won't last forever, so check it out now.

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

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (10) | Recommend This Article (18)

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 April 22, 2012, at 4:28 PM, tomd728 wrote:

    Thanks Rick........

    No one could argue aginst the continued onslaught

    of Android devices or the promise of continued

    app development etc.therein.

    But what does a multi-front attack lack ?

    1.Separate efforts will not insure true innovation.

    2.Is it catch-up and a mimic AAPL best ?

    3.How does the android crowd fight those

    great Apple stores ?

    4.There is an enormous base of anything Apple

    out there.

    5.Can the competion even get close to APPLs

    operating margins ?

    Sure........the Android mfgs will take share but

    what else can they offer against Apple's

    line of products and again at operating margins

    that are unheard of in a crowded field.


  • Report this Comment On April 22, 2012, at 5:29 PM, Stenniz wrote:

    When sellers take big profits,where do they put their money that it makes more profit then they were making in the first place? Seems kind of stupid to me!

  • Report this Comment On April 22, 2012, at 6:15 PM, rocker1941 wrote:

    Here is a name that makes ANY effort by Microsoft ineffective:

    Steve Ballmer

  • Report this Comment On April 22, 2012, at 7:49 PM, techy46 wrote:

    "Apple is, after all, (perceived) a premium brand."

    Well, well, Microsoft's Windows 8 strategy along with Windows Phone is starting to make some people actually think out loud. Carriers and other competitors, Google, Microsoft Nokia, aren't so convinced that Apple is a premium brand. AT&T's selling a lot of Lumia 900s from the underdog Nokia. That's woken up Verizon that three's maybe better than two. Apple's projected revenue and profit growth is not based on a threesome. This quarter will be OK for Apple but what about the next four after it?

  • Report this Comment On April 22, 2012, at 7:55 PM, fchain911 wrote:

    Investors eats from profits not from market share, share is for ego...

  • Report this Comment On April 22, 2012, at 9:00 PM, Drew9944 wrote:

    Interesting article. While I can understand why Verizon's CFO would hope there will be a cheaper SmartPhone that's as good as an Apple iPHONE, the reality has not happened, and is not about to happen. 2nd, the cheap end of the phone market is not competitive with Apple phones, but with Android phones. I know this having an Android phone for past year, because I got it for $0 down, and now can't wait till my contract is over so I can switch to an iPHONE. I say this because my Android phone is now broken third time, same problem in one year, and each time it costs me aggravation and lost time, and even money to send it back to the wireless carrier.

    Now since I got an Android phone for $0 down, how would the NOKA / Microsoft LUMIA phone for $99 down be a threat to Apple? IF ANYTHING IT IS A THREAT TO ANDROID PHONES, WHICH ARE THE LOWER HALF OF THE MARKET. But even there from what I've read, the NOK/MSFT phone is not taking much market share, because its built inside with last generation tech. (such as single core microprocessor) to save money. And it has Microsoft software glitches in it, thus that its been reported European Wireless Execs. have complained.

    OK, no problem you say, the Lumia Smartphone was just NOKIA's intro., and they just lost $1 billion this quarter since didn't sell enough -- but WINDOWS 8 IS COMING DOWN THE PIKE BY THE CHRISTMAS SELLING SEASON AND SO YOU SAY SURELY NOKIA/MSFT's SmartPhone will be better then. PERHAPS, BUT BY THEN APPLE WILL HAVE ITS iPHONE-5 MODEL OUT, so Nokia may be further behind.

  • Report this Comment On April 22, 2012, at 10:07 PM, lkmd2016 wrote:

    I have a shareholder since 1992. I wish there was a

    web site dedicated to analyst reports on Apple. One week ago Apple was untouchable going to 750-1000. the minute it hit 644 being the largest company ever.....boom the sky is falling and no one is buying apple products. I thank the idiot analyst for their incorrect predictions and giving me the opportunity to buy apple at discounts. Its PE is 16 with 100 BILLION dollars in the bank. Verizon is 1 of 200 carriers around the world. Qualcomm is predicting lower revenue because they can't make enough chips for Apple?? After earning and all the anxiety has subsided....whats next IPHONE 5 and a

    100 dollar rise!!! 650-750 by October...

    PS> The stores were a good idea....

  • Report this Comment On April 22, 2012, at 11:26 PM, modeltim wrote:

    One thing mysteriously missing from the "Apple Innovates" section - Steve Jobs is gone.

    Who or what people @ AAPL are the new innovators?

    Equivalent to Jobs or close enough?

  • Report this Comment On April 23, 2012, at 11:55 AM, lucasmonger wrote:

    Bold prediction (pure speculation based on no facts or rumors whatsoever)....

    While everyone has been chasing Apple (iPod -> Zune, iPhone and iPad -> Android and Windows phones and tablets) Apple will do an end run and reinvent the desktop and laptop computers. Physical keyboard and mouse could become optional, it could be touch-based but not an oversized iPad, and the industry will once again be upended.

    The TV thing might just be well placed misdirection.

  • Report this Comment On April 25, 2012, at 2:29 PM, HappyEndingz wrote:

    Exhibit A is on a collision course with Exhibit B, and the end result for Apple fans is Exhibit C -- I told you so.

    Awesome call, Rick!

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