The Next Game Changer for Apple Stock?

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Apple (NASDAQ: AAPL  ) stock slid during Tuesday's trading session despite a strong surge in the broader market that saw the S&P 500 climb more than 0.5%. One possible reason for the decline is a research note out of Citigroup that strongly suggests margins will continue to face pressure as consumers opt for lower-priced devices. Apple stock, which topped $700 last fall, fell below $400 recently and has traded in the mid-$400 range ever since. Regardless of Cupertino's ability to innovate, if Wall Street sees margins come under pressure, this may be the game-changing catalyst needed to break the current trading range. Unfortunately, it looks like it could be to the downside.

Opinion in the Citi on Apple stock
In a recently released research note, Citi's Glen Yeung reiterated his neutral rating, citing concerns over margin pressures at Apple. The driving force behind these pressures, in Yeung's opinion, is a product mix that is shifting toward cheaper products. Not only is Apple selling more older iPhones -- including the iPhone 4 and iPhone 4S -- it is poised to release a cheaper iPhone. He also referenced the possibility that the company may release cheaper version of the iPad to be more competitive with various Google (NASDAQ: GOOGL  ) Android tablets, like the Nexus 7 or Kindle Fire.

Last March, IDC reported that Android tablets had continued to expand their market share at the expense of iOS devices. A reasonable driver of this trend is the price difference that exists between Android and iOS tablets. According to the report, Android will command 48.8% of the market in 2013, relative to 46% for iOS. Additionally, IDC sees a significant shift to smaller tablets as the preferred size.

There are rumors that Microsoft (NASDAQ: MSFT  ) wants to get into the cheap tablet game with the possibility that it will acquire the remaining piece of Nook Media that it does not own. This would allow the company to round out its own tablet offerings beyond the Surface RT and Surface Pro, each of which carries much higher price tags. While an insider denies the rumor, the acquisition could make the company's tablet offerings more interesting. Competition is the small tablet space from both Google and Microsoft has kept pressure on Cupertino and had a negative impact on Apple stock.

Ultimately, Yeung sees the margin pressures that the weakening product mix creates as a negative for Apple stock, and a significant reason that shares will remain range-bound looking ahead. Adding to this pressure is the fact that global growth rates are slowing based on mobile saturation. These combined pressures may keep Apple stock from returning to previous highs in the foreseeable future.

Market pressures
Beyond company-specific headwinds, the overall position of the equity market should be a concern for anyone interested in Apple stock. Stocks have been on an impressive run, but it cannot last indefinitely. There is a strong argument that the rally has been created by the action of the Federal Reserve. As an increasing contingent of the FOMC begins to consider slowing or reversing the current policies of quantitative easing, there is real concern that the rally could fizzle.

The single greatest threat to Apple stock over the next several months is the direction of the broader stock market. In the absence of a real game-changing product, Apple will be subject to the vagaries of the overall equity market. Even if stocks can continue to run higher from here, a correction is likely over the course of the summer. When this happens, Apple stock is likely to fall to new near-term lows.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with more than 1,000% gains. However, 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 reasons to buy and sell Apple and the opportunities 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 (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 May 29, 2013, at 11:52 PM, singaporenick wrote:

    Another boringly negative article about Apple from this guy.

    In fact his thesis is already shown to be wrong by today's market.The NASDAQ market in general declined 0.61% while Apple shares rose 0.80 %

    Back to the drawing-board Mr Ehrman,,,

  • Report this Comment On May 30, 2013, at 1:09 AM, jordanwi wrote:

    While it IS a boring article, one day hardly disproves this investing thesis.

  • Report this Comment On May 30, 2013, at 1:40 AM, haysdb wrote:

    "the company may release cheaper version of the iPad to be more competitive with various Google Android tablets, like the Nexus 7 or Kindle Fire."


  • Report this Comment On May 30, 2013, at 1:53 AM, haysdb wrote:

    "Today Citi’s Glen Yeung and team initiated coverage of Apple with a Buy rating and $675 price target, noting that investors should take advantage of the recent selloff"

    Nov 26, 2012.

  • Report this Comment On May 30, 2013, at 2:25 AM, JokerJoey wrote:

    Two points:

    1) Apple WILL come out with a game changer shortly, so there goes the if, if not thesis.

    2) Margins may contract with things like a cheaper iPhone. However if they sell five times as many units because of it, lower margins will be a non-issue, being eclipsed by much larger revenues and therefore much greater profits.

    My advice: Get in here because when the stock trades back near $650 you'll be crying if you don't. That day is not as far off as some of the negativists would have you believe.

  • Report this Comment On May 30, 2013, at 9:23 AM, RuggedGuy wrote:

    Analysts and investors may have the margin element and forecast all wrong with respect to the "cheaper" iPhone. Right now Apple is selling fairly high cost, beautifully designed older models to the mid and lower end of the smartphone market. In a way, they are stuck in a difficult position without a true mid-range phone. A new model with lower costs that sells to the same segment or even a slightly expanded low-end segment could actually lift the overall margins for iPhone in the aggregate if they execute it well. The key will be how they differentiate the products and the customer base. Perhaps the just released iPod touch without a rear camera and a few other nice to have features is an indication of how Apple could use features and lower component costs to help segment markets.

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