Apple (AAPL 1.27%) bulls took off for the weekend early, letting the bears call the shots on Friday. Shares dropped more than $15, or nearly 3%, on a day when the broader market was relatively flat, as the three major indices were each up less than half a percent. What caused the weakness, and do investors have anything to be concerned about?
Back to the Mac
Market researcher NPD said on Friday that consumer electronics sales over the holidays fell 7% relative to a year ago, to $13.7 billion. Looking at the five weeks spanning Nov. 18 to Dec. 22, sales were strong for the first two weeks and fell off from there. NPD said that aggressive promotions during Black Friday and Cyber Monday have successfully shifted spending toward the start of the holiday shopping seasons.
Microsoft (MSFT 0.37%) Windows 8 has done little to spur notebook sales, and Windows laptop sales over the holidays were down 11% with average selling prices, or ASPs, roughly flat at $420. Apple wasn't immune to the weakness in laptop demand, with MacBook sales falling 6%, although ASP increased by nearly $100 to $1,419.
While the news is certainly negative for Apple, it's not exactly a shocker that the broader PC market isn't so hot right now. Mac portables have accounted for 11% of trailing-12-month sales, so expectedly declining MacBook sales can't hurt too much. The ASP figure that NPD came up with is on the high end, as Mac laptop ASPs haven't topped $1,400 since 2008. MacBook ASP rose sequentially last quarter to $1,356, potentially with the release of Retina display models that carry premium prices.
Also, and perhaps more importantly, NPD's definition of consumer electronics excludes tablets such as the iPad and Surface and mobile phones. That means the broader 7% decline that NPD is reporting has no bearing on the two product categories that matter the most to Apple: iPhones and iPads.
Copying the copier
Reuters also reported on Friday that Samsung is expected to widen its lead over Apple this year as the top smartphone vendor in the world, a title that Sammy earned in 2012. The estimates come from Strategy Analytics, which also expects Apple to broaden its iPhone lineup beyond the singular model it releases every year.
Of the 875 million smartphones expected to ship in 2013, Samsung is expected to move 290 million units, compared with Apple's 180 million units. Those figures represent market shares of 33% and 21% for Samsung and Apple, respectively. Strategy Analytics specifically cited Samsung's "larger multitier product portfolio" as a strength in its competition against Apple. This is particularly interesting, because Apple's strategic focus on product depth over product breadth has been a key reason to its precipitous rise over the past 15 years.
However, releasing only one model each year inevitably entails risks if that device doesn't appeal to enough consumers. Specifically, there are two market segments of the smartphone market that Samsung is addressing quite well that Apple is overlooking: low-end devices and large displays. Samsung offers a wide range of smartphones, some of which occupy lower price points, while it's doing quite well in the phablet category with its Galaxy Note II.
Playing in those markets has helped Samsung grow its market share, which makes the case for why Apple should consider potentially expanding the iPhone family. Some analysts think this is in the cards, and that Apple will launch an "iPhone Mini" this year with a smaller display to target lower-end markets, particularly in emerging markets and countries where carriers haven't adopted the subsidy model that Apple relies heavily on. It's also a possibility that Apple will copy Samsung next and go larger with the iPhone to sell to consumers interested in larger smartphones.
Hope is on the horizon
Ultimately, Apple is still more profitable than Samsung in smartphones, in part because of its hesitance in addressing lower-end segments. More importantly, Apple is about to report fiscal first-quarter earnings in less than three weeks. If Apple posts a blowout, which is a distinct possibility, Friday's chatter will promptly fade.
