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So the choir of praise is nearly unanimous. But I don't feel like singing along.
The warning signs keep piling up around this supposedly unending success story. That momentum is one red flag in and of itself, but there's lots more. Let me point out four ways that Apple will disappoint investors before too long:
The illusion of hypergrowth
While Apple really is growing at a legitimately exciting clip, investors read way too much into the latest earnings report.
iPhone sales in the first quarter more than doubled YOY. If you see that as the run rate going forward, I've got news for you: The iPhone refresh was unusually late this year and tons of would-be buyers held off on buying one until the holiday quarter. Did you forget the miss in the previous quarter already?
It's okay. I understand. Denial is a perfectly healthy coping mechanism. But that fourth-quarter disappointment set the stage for a tremendous upsurge of iPhone sales over the holidays, and also dragged shares prices down to prime this year's impressive run.
It really happened: iPhone sales in the fourth quarter missed analyst targets by a country mile, jumping a mere 21% YOY. The real growth rate lies in between these two extremes. So should your realistic expectations for future growth.
The iPhone as a commodity
Right now, Apple holds a unique spot in the smartphone market. No matter how hard Google
I'm sure this won't last forever. It's always tough to pin an end date on recent fads. When American Idol was new and fresh, I though the show would keep its novelty appeal for four seasons or maybe five, but it took 11 years before viewers started switching the channel on that particular show. So although my timing may be off a little bit, but consumers will eventually turn their attention elsewhere.
That's really all Apple's iStuff is -- an enormous and very profitable fad. It's the Pet Rock of the new millennium.
And that leads straight into…
The "cool factor" is fading fast
You heard me. Apple is getting too popular for its own good.
"All of a sudden, every teenage girl has an iPhone," says Canaccord Genuity analyst Michael Walkley. "The real danger is that Apple becomes so mainstream that there is a breakaway by consumers to something new."
Do you really think that these superior growth rates can continue when the young ones start treating Apple's products like a McPhone? Big sales will linger for a while even after the trendsetters turn their back on Cupertino, but the shark will have been jumped and the only way is down.
Think it can't happen? Think again.
There was a time when Research In Motion
That was then, this is now. iPhones and iPads are the new iCrack products. You'll notice that nobody cares much for the BlackBerry anymore as RIM circles the drain. Palm is already dead, snapped up by Hewlett-Packard
Neither Palm nor RIM ever quite reached the lofty heights that Apple inhibits today, but you know what they say: the bigger they are …
The final straw
And that brings me to the real deal breaker. The iPhone is too expensive. The networks that already hate the low margins it brings them can't be expected to pay huge subsidies for much longer.
Right now, carriers fall over themselves to sell the iPhone -- but they do it through gritted teeth. Sprint Nextel
"A logical conclusion is that the iPhone is not good for wireless carriers," concludes Mike McCormack, wireless analyst for Nomura. "The carrier-level value destruction is quite evident."
In Europe, where the networks don't do as much of Apple's heavy lifting, iPhone market shares often linger in single-digit territory. Sprint and friends must eventually run out of patience with Apple's profit-sapping pricing strategy. At that point, one of two things will happen:
- Apple will lower its direct prices to the carrier.
- iPhone sales will drop through the floor as consumers balk at the sticker shock.
Either way, Apple's salad days will be over. If the iPhone becomes expensive, there's no shortage of Android alternatives to choose from. The barriers to entry in the mobile market have also turned out to be surprisingly low; maybe the next big thing will come straight out of left field, like the original iPhone did.
By then, the company had better have its next market-breaking invention ready and it had better be an unqualified hit. If not, well, look out below.
None of this will materialize this week, of course. The worst that can happen here is that the iPad 3 leaves consumers cold, in which case phone sales will smooth things over for another quarter or two. Just remember these big, unavoidable issues when the big drop finally happens. I have a bearish CAPScall riding on that thesis and expect it to pay off in the next year or two. Check up on my all-star CAPS profile any time you like. That's the best way to hold me accountable for my market calls.
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