Apple (NASDAQ:AAPL) didn't exactly come out swinging in 2013. So far this year, the stock has closed lower on eight trading days and higher on just three. The stock opened up strong this morning but quickly reversed course, so today's final outcome is still up in the air. Despite a huge 4% jump on Wednesday, shares have lost 5% of their value even as the Dow Jones Industrial Average (DJINDICES:^DJI) gained 3%.
Zooming out to a longer-term perspective doesn't help Cupertino much. The stock is down 22% over the last three months, while the Dow traded sideways, and the underperformance stays at 23% in a six-month perspective as well.
Join the club, guys
As an Apple bear myself, I don't feel like such an outsider anymore. More people have caught on to Apple's weak spots as they start to impact real-world business results. A year ago, I slapped a thumbs-down CAPScall on Apple, predicting some short-term upward momentum trending into a long-term plunge. Take a walk down memory lane with me:
There's a fair bit of market momentum behind this mirage. Well, tough. Market timing is a sucker's game anyway. Come back in two or three years, and I believe that the growth story will start to crumble.
The payoff is coming quicker than I expected.
Today, investors worry about the following problems:
Holiday-quarter demand for the cash-cow iPhone line may not have been as strong as predicted. Apple slashed component orders in the first quarter, presumably to work a supply glut out of the system.
In particular, consumers don't seem overly interested in the most profitable iPhones. The component cuts were specific to the high-end iPhone 5, meaning that less profitable models from prior years are selling too well. That's bad for Apple's margins.
And why should we buy iPhone 5? Aside from sporting a slightly taller screen and much faster processor than last year's 4S model, there's not much setting the new handset apart from the old one. Apple may be engineering the heck out of the iPhone's innards, but do consumers really care how beautifully the phone is designed on that end? After all, you need special tools just to open iGadgets up and change the battery.
The same story goes for the iPad line, too. The iPad 3 was quickly followed by the iPad 4 and iPad Mini -- and the market plunge continued because there's nothing special about the new devices. But the Mini does come with a price advantage to consumers, which sets it up to reduce Apple's overall profit again.
If the immediate demand picture weren't troublesome enough, Apple is about to feel even more pressure on its top-to-bottom margins as wireless networks grow tired of passing their profits on to Cupertino. T-Mobile USA is first out of the gate, vowing to start selling iPhones in 2013 and stop paying smartphone subsidies by the end of January. There's no telling what tricks Sprint Nextel (NYSE:S) will start playing under the wing of Japanese iconoclast Masayoshi Son later this year, but it's a fair bet that we'll see totally new pricing plans. Son didn't make his personal billions and build Japan's second-largest mobile network by passing his profit on to handset builders, after all.
And those are just the first shots of the coming revolution. In the wireless industry, the big boys are often forced to copy the tactics of smaller and hungrier players -- or risk losing customers by the boatload. Indeed, Verizon (NYSE: VZ) and AT&T (NYSE: T) have both made it clear that subsidies hurt them and that they wouldn't mind following suit if T-Mobile's experiment works out. When that happens, Apple's fantastic cash machine grinds to a painful halt. Cupertino just wasn't built to operate with industry-standard gross margins.
None of these worries is particularly new or surprising. They're exactly the same things I have seen coming for years and decided to take bearish action on last year. That CAPScall has been a heavy load at times, but Apple is back to just barely beating the market since the year-ago earnings report.
In next week's earnings report, Apple gets to dispel or confirm some of the current worries, and it might rise again if the news isn't too terrible. Regardless, it's still a house of cards resting on fickle consumer trends and an unsustainable margin structure. Apple may become a good value and dividend stock some day, but it will never be the trillion-dollar monster everyone thought they saw coming in 2012.
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