Apple (NASDAQ:AAPL) is off to a rough start in 2015. Like many market darlings, shares of the consumer tech bellwether have slumped with the general market. Apple stock may have managed to close higher in each of the past six years -- it's true, look it up -- but a stingy market and lofty expectations threaten to end that enviable streak this year.
It doesn't have to be that way, of course. Apple's been off to slow starts in other years, even correcting sharply before finding ways to bounce back with market-thumping returns by year's end. Let's go over a couple of the things that the class act of Cupertino will need to get right in 2015 to stretch its winning streak to seven years.
1. The Apple Watch needs to be a hit
Apple's problem -- if you can call it that -- is that it's relying more and more on the iPhone to bring home the bacon. Apple's iconic smartphone accounted for 56% of its revenue in 2014's fiscal fourth quarter, up from a still sizable 52% chunk of the business a year earlier. It's also widely assumed that the iPhone commands an even larger slice of Apple's operating profit.
With the iPod fading and the iPad meandering, it can't be up to the recent revival in its legacy Macs and Macbooks to save the day. Something new is going to have to diversify Apple's egg basket, and that could be the smartwatch.
The Apple Watch was unveiled late last year, but we still don't have a firm release date beyond early this year. It's true that Apple's smartphone rivals haven't really succeeded with their own smartphone-tethered wristwatches; but didn't early consumer smartphones and tablets fail to gain traction until Apple convinced us that we needed them?
The Apple Watch isn't about delivering incremental revenue growth. The new device can help attract and retain consumers to Apple's iOS ecosystem. That might be bigger than any initial sales of the wearable computing device itself.
2. Margins need to continue widening
Apple's net profit margins peaked at 26.7% in fiscal 2012 before plunging to 21.7% in fiscal 2013. Things didn't get any better last year with net margins clocking in at 21.6%. The cutthroat nature of the Android challenge to iOS devices stung gross margins in fiscal 2013. Apple did manage to post slightly improving gross margins in fiscal 2014, but it's far removed from where it was two years ago.
These trends must improve in fiscal 2015. Analysts see it that way. They're forecasting earnings per share to climb 21% this year, outpacing the 16% uptick in revenue. In a world of Android devices being sold at razor-thin margins, Apple must prove that it still commands a healthy markup.
3. Apple needs to make waves in digital music
The iTunes Music Store as we know it is in trouble. Folks just aren't buying downloads anymore. Streaming is where it's at, and Apple finds itself in a rare position of having to catch up to an industry trend.
Trend tracker Nielsen reports that digital album and single sales were down 9% and 12%, respectively, in 2014. We're still consuming a ton of music, but we're doing so by streaming tunes through Spotify, YouTube, and Pandora.
Apple rolled out the Pandora-like iTunes Radio in late 2013. It then snapped up the Spotify-like Beats Music platform in early 2014 as part of the deal for Beats Electronics. Apple has its foot in the two doors that matter, but it needs to amplify its presence in 2015. If it doesn't buy Spotify or Pandora, it better make sure that its in-house offerings gain traction this year. There's money to be made in music, and Apple needs to get there now that iTunes is showing signs of peaking.