3 Reasons To Stay Away From Apple

In my last post, I painted a very bullish picture for Apple  (NASDAQ: AAPL  )  driven by the company's small-scale innovation and gigantic share buyback plan. Now it's time to look at the other side of the coin: Here are three reasons why you might reconsider a long position in Apple for the long haul. 

Margin focus not market share
Apple is definitely inclined to preserve its identity as a "premium brand." The company's recently unveiled line of iPhone and iPad products are priced for high-end consumers and the company's gross margins are unlikely to compress in the near term. Those are largely positive outcomes, but that strategy might not play out well in the long term. The market share of iOS has been attacked by phones running on Google's  (NASDAQ: GOOGL  )  Android OS. 

Google's CEO disclosed in the most recent earnings call that more than 1 billion Android devices have been activated worldwide and 1.5 million new activations are taking place every day. Those are staggering numbers for Android! Different manufacturers using Android's open source OS are appealing to the masses around the world making the market for devices very competitive. 

At the end of 2013 second quarter, the market share of iOS declined to 13.2% from last year's market share of 16.6% and the market share of Android increased to 79.3% from last year's market share of 69.1%, according to IDC. 

Apple's new iPads and iPhones will aid the company's revenue growth going into the busy holiday season. However, Apple's pricing of iPhone 5c will have a difficult time competing in the lower end of the smartphone market. If Apple products remain expensive the company's penetration rates will hit a brick wall sooner or later. 

Product refresh is good but not great
Apple's product launches have been pretty decent, especially going into the busy holiday season. However, the new line of iPads and iPhones do not have a "wow factor." The iPhone 5s and 5c are largely evolutionary product refreshes for the company, and is unlikely to be a game changer for the company's revenues after a few quarters of strong sales.

A lot of investors have been disappointed by Apple's pricing strategy because the company did not come up with a low-end phone. The company's iPhone 5s has been a stellar success and has been sold out and awaiting more supply. However, the relatively lower priced iPhone 5c got a weak reception from consumers prompting Apple to cut orders from component suppliers.

However, innovation still remains a challenge for Apple, and its competitors are almost certain to react to Apple's newly released items quickly. Apple faces intense competition in the tablet space from Amazon, Samsung and Google. Apple is still the top dog in the tablet market, one it created in the first place, but the company is losing market share.

According to IDC, Apple's tablet market share stood at 32%, which is a heavy decline from its year ago market share of 60%, and Samsung now holds 18% market share which is a notable improvement from its year ago market share of only 8%. With such intensifying competition, Apple needs to come out with major innovations to grow its revenues in fiscal 2014.

The Chinese market
The cut-throat competition in the devices business is making OEMs look like commodities. As a result, Apple is unable to reap the benefits of its premium brand in its second-largest market, China. Apple's market share trickled down to roughly 5% in China, making it the number 7 handset maker in the country, well behind Samsung and other regional rivals like Lenovo, ZTE etc. 

And if Apple continues to charge high prices for its products despite reasonably low manufacturing costs, the company will keep losing ground in the critically important Chinese market. Component and manufacturing costs of the iPhone 5c and iPhone 5s are roughly $173 and $199 respectively, according to estimates from IHS iSuppli. But the company is charging much higher prices for those phones. The iPhone 5c starts at $549 and the iPhone 5s starts at $649. 

At these prices the company will be unable to appeal to more consumers in China. Apple's revenues in the Greater China region in the last quarter declined 14% year over year. And going forward reigniting growth in China will be very important for the company. In addition, analysts and investors alike were very optimistic about Apple's ability to clinch a deal with China Mobile, but no deal has been reached thus far. 

Going Forward
In spite of the negative factors outlined above, Apple still has a lot of room to grow and innovate. The company should focus heavily on innovation and ramp up its R&D efforts to overcome competitive and regional headwinds. The company has a lot of cash with which it can heavily increase its research and development budget and grow its revenues to steal market share from competitors across the globe. 

Profit from Apple's destruction
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Read/Post Comments (7) | Recommend This Article (5)

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 October 26, 2013, at 10:59 AM, longdoc wrote:

    Apple doesn't care about market share. Apple makes products that are aspirational. They don't need to be number one in volume.

    Once again, Apple stores around the world will be packed with shoppers for the holidays. Compare the delight of opening an iPad gift vs a Kindle?

    Now consider the metric that really matters....profit share. Just because the market has been short-sighted regarding Apple doesn't mean that you should follow them.

  • Report this Comment On October 26, 2013, at 11:02 AM, larryw101 wrote:

    This article is probably the best example of why Motley Fool has become the least credible source of information when it comes to investing. They have these amateur writers on here who post worthless articles in order to get their penny a hit when you click on their story, and Motley gets two cents from advertisers.

    Go to any stock message board and ask what investors what they think of Motley. It's overwhelming how many responses you will get. No one has anything good to say. They laugh at them. When is Motley going to wise up?

    This guy Faruk who wrote this article doesn't even have anything listed in his profile. Where are his credentials?

    Where does Motley find these bozos?

    Shame on Motley !

    They are an embarrassment to any financial web site.

  • Report this Comment On October 26, 2013, at 12:35 PM, thethreestooges wrote:

    This Faruk guy is an idiot!

    He wrote an article: "Great Reasons for Owning Apple" on Oct 18, 2013

    http://www.fool.com/investing/general/2013/10/18/apple-is-a-...

    and in once week time, he said to stay away from APPLE.

  • Report this Comment On October 26, 2013, at 12:53 PM, DanManners wrote:

    There is a chinese restauarant on 10th Avenue and 48th street that is called Foo King. Google it.

    Anyway, this is another bash job. you and Rick M. should get together and bash bar mitzvahs. You can grow your line of work.

  • Report this Comment On October 26, 2013, at 2:17 PM, longdoc wrote:

    I think that a lot of the mindless anti-Apple drivel out there is sponsored by Samsung and others. Samsung is notorious for paid placements.........

  • Report this Comment On October 26, 2013, at 2:38 PM, johnestromjr wrote:

    "...the company's small-scale innovation." Huh? And nowhere in your article do you mention that 84% [approx.] of ALL traffic is on an Apple device - in spite of the 1 billion Android devices. What does that mean? It means that the overwhelming bulk of traffic [and potential ad revenues] are NOT on Google's and Samsung's devices but on Apple's.

    I'm glad Apple isn't trying to get every user on an Apple device but rather are trying to produce the best product to give the best performance and experience and maintain a high margin. Everyone wants to have nice things. Most can't afford them but they STILL want them. The affluent can afford them and do. So I applaud Apple's philosophy. There is still room for healthy competition and we ALL gain from it. Keeps Apple sharp and competitive.

  • Report this Comment On October 29, 2013, at 10:23 AM, larryw101 wrote:

    Attention Faruk: How was your crow dinner last night.

    Apple bashers like you belong on message boards.

    Shame on Motley. I have lost all respect for Motley with garbage article like this.

    Bye, bye Motley. And to Faruk, find another job!

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