Is Apple Destined for a Lost Decade?

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Imagine waking up 10 years from now and Apple (NASDAQ: AAPL  ) has gone essentially nowhere. All that promise of continued iDomination fell completely short of expectations, and as a result, investors have become disillusioned with where Apple's is headed next. Welcome to the Apple lost decade.

After all, the company has yet to prove that it can revolutionize entire industries without the contribution of Steve Jobs' visionary genius. To this very day, Apple is still riding on the coattails of Steve's vision, and it appears the company is milking that for all it's worth. For better or worse, Apple shareholders are left reconciling this potentially stark reality, and are also stuck with Tim Cook as captain of the ship. Cook, who has been highly regarded as a top-notch operations man -- a great asset for the company's supply chain, mind you -- but is he really the captain of the ship? Does he possess the same sort of vision Steve Jobs had? Unfortunately, the world is still waiting for this answer.

The longer the world waits, the longer Apple's P/E remains compressed relative to the market, which ultimately perpetuates this cycle of under appreciation. Currently, Apple's P/E is being compressed by more than 40% relative to the market's current valuation. Does a company with the earnings potential of Apple deserve this sort of treatment? Well, if the company no longer thinks in terms of being revolutionary, investors may be in for another reality check.

Telltale signs
Although Apple is expected increase its smartphone volume along with the industry, it isn't actually expected to gain much in the way of market share. Naturally, Google (NASDAQ: GOOGL  ) Android is expected to maintain its majority share in the coming years. Considering that Android has finally surpassed Apple in terms of smartphone Internet usage, it's likely only a matter of time until the same thing happens in tablets.

On the tablet front, Android's market share is expected to surpass Apple's market share this year, thanks to the rise of low-cost small-screen devices. If we take what happened between Apple and Android in the smartphones and apply it to tablets, it starts with Android's market share surpassing Apple's, and ends with a shift in usage share away from Apple. These shifts could create a situation where Apple developers ultimately migrate over to the Android ecosystem. After all, an ecosystem is only as good as its App Store.

However, if Apple can just hold the line and simply sustain its current market share through 2016, it would mean that Apple will increase its iDevice volume by more than 70% from the end of 2012. In other words, the power of compounding could have profound effects of Apple's business. It wouldn't matter how un-revolutionary Apple devices are perceived to be because that sort of growth would almost guarantee that its share price would reach new heights. Perhaps investors have their doubts about this possibility?

Money on the table
Let's face it: Apple is leaving serious money on the table because it hasn't specifically released a product for emerging-market opportunities. On a worldwide basis, smartphones only represent 25% of all mobile phones, which suggests that emerging markets remain a tremendous growth opportunity in the years to come. If or when Apple decides to address this business opportunity, it would likely give a vote of confidence to shareholders that the company is tapping new avenues of growth.

Mr. Softy, version 2.0
Back in the heydays, Microsoft (NASDAQ: MSFT  ) was the ultimate high-flyer. That was well over 10 years ago, and to this day, shares haven't even come close to those levels. At that time, Microsoft's P/E hovered around the 80 level, a valuation that could only be justified during the exuberance of the dot-com era. When Apple hit its all-time high of $705.07 back in September, its P/E sat around 16.5, a number far from exuberant. However, the exuberance wasn't based on valuation, it was based on investor expectations, which largely believed that Apple, the most revolutionary company on the planet, could grow indefinitely. Given Apple's legacy, it's not surprising for investors to get carried away with this idea, only to be disappointed when reality set in.

Will Apple's legacy continue getting in the way of an excellent company that's has a high chance of being undervalued? Could it bear enough weight to keep a lid on Apple's share appreciation over the next decade?

There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (6) | Recommend This Article (7)

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 March 20, 2013, at 11:37 PM, Thompr97 wrote:

    Even if - and I admit it's a a ridiculous hypothetical - Tim Cook were a Steve Jobs clone, Apple the COMPANY might have followed the same trajectory, made the same, slow, calculated, secretive moves, that they are now. But the stock may or not be languishing with every fit and worry of analysts, pundits, and hedge fund managers.

    In other words, keep calm and give Tim a chance to do what Apple does. Namely, do its own thing on its own time.


    Watch Apple amaze us again a few times over the next decade. They haven't proven they are lost yet. When they start releasing failure after failure every 2 years, ala Microsoft this decade, in an attempt to appease Wall Street worry-warts, then become concerned.


  • Report this Comment On March 20, 2013, at 11:48 PM, Jjkiam wrote:

    Yes another article that projects the demise of Apple. What a surprise ! Except for the reality that Apple is continuing to grow. The idea that Apple's previous product innovations were only due to Steve Jobs is something that I hope the media keeps repeating as the basis for all the incredible doom and gloom. If Jobs has a legacy it is his insistence on only working with A players. I hope all this chatter helps motivate people like Tim Cook,Jonny Ives and all the thousands of remaining apple innovators to prove that Jobs wasn't a 1 trick pony

  • Report this Comment On March 21, 2013, at 12:17 AM, TMFTopDown wrote:

    Jjkiam --

    As you can see in the disclosure above, I am long shares of Apple. Even as an Apple bull, I find it valuable to take the other side of the debate for the sake of perspective. It helps make me a better investor.


    Steve Heller (TMFTopDown)

  • Report this Comment On March 21, 2013, at 12:22 AM, esxokm wrote:

    This is one of the best articles I've read. Why? Because every investor needs to be reminded:

    One day, all growth stocks eventually become mature dividend-paying stocks that tend to trade flat for long periods of time.

    Nothing goes up at the same rate forever. You can still be an Apple bull, but you've got to temper your expectations.

    AAPL will become MSFT someday. When? No one knows. APPL will be around for a long, long time. And it will still have growth spurts.

    But there will be times when it acts like KO stock (check out that history). That's just the way it is.

    So, what actionable advice can be taken from such philosophical discussion?

    Learn the art of selling covered calls and cash-secured puts. And study up on LEAPs. This area of investing can be used to make the most of an AAPL (or any) position.

  • Report this Comment On March 21, 2013, at 1:06 AM, neocolonialist wrote:

    So, I am not an AAPL can do no wrong type, but this article's premise seems a bit off to me. Let's see, Tim Cook hasn't introduced a product as cool as Steve Jobs did yet, so he is obviously incapable of doing so and AAPL is running out of Steve Jobs steam so its pretty much done.

    Wow, well your crystal ball may be better than mine, but betting against what the most profitable non-oil company ever after they just had their most profitable quarter ever is the way to go? I think the jury is still well out on Cook, and their growth hasn't slowed nearly as much as the market has priced into their stock. In fact, one mean product and I suspect you will start seeing articles about how AAPL isn't done yet and such.

    I think AAPL is a steal atm, but we'll see.

  • Report this Comment On March 21, 2013, at 3:39 AM, OracleofOmahaha wrote:

    Well under Jobs it took around 10 years to go from the iPod to the iPhone to the iPad and in between Apple produced many versions of these products. However, no one ever questioned that Jobs was not innovating fast enough. Here is an idea, why don't we give Cook the same opportunity to succeed instead of counting every minute that passes until Apple announces their next new product. This may be difficult to understand but the higher your standards then the more time is required to design, build, test and release a quality product. Anyone can quickly mass produce crap.

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