Apple (AAPL +0.33%) has been and continues to be an impressive company. Apple and its products are household names at this point and its financial results continue to be nothing short of eye-popping. However, as wonderful as thing are for the company today, no business is without risks. Although Apple is doing extremely well today, it's not invincible to factors that could cause its share price to come down, potentially significantly, from current levels.
Huge reliance on iPhone sales
In its last fiscal quarter, Apple's iPhone revenue came in at a whopping $51.182 billion (57% growth year over year), representing 68.6% of total company revenue during the quarter. To put this into perspective, Apple's second largest product category by revenue was the iPad at $8.985 billion, which actually represented a 22% year-over-year decline from the same period in 2014.
Obviously, the good news is that Apple's iPhone business is believed to be its highest margin and it's, not coincidentally, the company's fastest growing business, too. If Apple can keep growing iPhone sales, while keeping its average selling prices and margins in check, then that would be wonderful.
But what if iPhone sales growth slows down dramatically? Or worse, what if iPhone sales and/or margins start to contract? Such a phenomenon, whether one believes that those outcomes are highly likely or next to impossible, would likely have a significant impact on the company's profitability and its stock price.
That's why it's important to keep an eye on both the secular trends in the smartphone market as well as any potential competitive threats that pop up. Although the iPhone 6 and 6 Plus have put Apple in a strong position, it'll be important to keep an eye on how other Android flagships fare in the marketplace.
iPad business is sick
Once a major growth story for Apple, the company's iPad business seems to be falling apart. The product category has seen unit shipments and revenue decline over the last few quarters, with the revenue decline year-over-year worsening to 22% in the company's most recent quarter.
Although the current strength in the iPhone and Mac allows Apple to grow even with iPad doing poorly, if the weakness in iPad persists, then this only amplifies any potential risk from a weakening iPhone business.
Apple Watch could flop
It's not clear how much investors are baking in a potential Apple Watch success into the current stock price. However, according to an article published in Business Insider, analyst estimates range wildly from 7.5 million units shipped in the first year to a staggering 31 million.
Business Insider actually took the average of the major analyst predictions and got 14.6 million shipments (they even gave an average stripping out the highest number, yielding 13.1 million). Keep in mind that even hitting the average would be impressive given that competing smartwatches have probably sold just a fraction of that.
It's not clear to what extent these Apple Watch forecasts are built into analysts' financial models, and it's also not apparent what average selling prices these unit estimates assume, but if the analysts are being optimistic, Apple will have a high bar to clear. Failing to clear said bar could potentially lead to downside to future estimates as well as to the share price.
