I Can't Believe I'm About To Say This About Apple

The last time I featured Apple Inc. (AAPL)—back in January—I had the stock at a hold, but I hoped that the company could redeem itself with first-quarter earnings and that I could upgrade it once more. But I also knew that things could go the opposite direction, so at the time, I remarked:

“Especially in the tech sector, a company’s fortunes can change on a dime. Yesterday’s big winners could gap down while last year’s underdogs come back in full force.”

And looking back on the past few months since then, boy did that ever hold true! Three months, and a 17% drop later, AAPL stock has had quite a ride. So let’s take the chance to revisit the tech giant that continues to dominate headlines and polarize Wall Street.

Apple in the Post-PC Age

At least one thing hasn’t changed, and that’s the continued decline of the personal computer industry. In fact, Intel Corp. (INTC), Hewlett Packard Corp. (HPQ) and Microsoft Inc. (MSFT) are all trading down today on dismal news: First-quarter PC shipments plunged 14% compared with last year. This is the biggest sales drop on record.

Consumers around the world are replacing their desktops and laptops with smartphones and tablets, which are smaller, cheaper and more convenient to use. So this year, analysts expect tablet shipments to top 200 million and smartphone shipments to break the 1 billion mark!

With Apple commanding about 40% of the U.S. smartphone market and about 50% of the global tablet market, wouldn’t 2013 be a banner year for Apple Inc.?

Well, not exactly. One only has to look to its upcoming earnings announcement (due on April 23) to see that Apple Inc. is struggling to accelerate sales and earnings. For the second quarter, analysts expect to post 9% sales growth, but an 18% drop in profits. Looking ahead to all of 2013, earnings are expected to be flat.

So what’s going on?

Market Crowding

For one, the competition is heating up. For the past few years, Apple enjoyed a first-mover advantage with the iPad, and to date it’s still the best selling tablet on the market. But Amazon Inc. (AMZN), Google Inc. (GOOG) and Microsoft have all been working furiously to break into this market, and their efforts are starting to pay off.

  • Amazon reported a 70% jump in e-book revenue last quarter.
  • Google has sold 4.5 million Nexus 7 tablets since it launched last summer.
  • While Microsoft Surface sales have underwhelmed expectations with 1.5 million in sales since launch, that’s still eating away Apple’s market share.
  • And I haven’t even mentioned Samsung, which boasts over 18% market share—the Galaxy tablet family presents perhaps the largest threat to Apple.

In the smartphone arena, Apple has to contend with the likes of Samsung, Google and Research in Motion (BBRY).

But perhaps Apple Inc.’s biggest competitor is itself. To start, with 2012 being a record year in terms of iPhone and iPad sales, Apple is finding it difficult to match its previous success and the market’s lofty expectations. We saw this in the last earnings report, when Apple’s $54.51 million in sales missed the $54.73 billion consensus estimate. If you remember back to then, shares of AAPL plunged to an 11-month low on the miss.

So analysts have wizened up to the fact that Apple isn’t going to continue to grow at the blistering pace it once did. As I mentioned earlier, analysts have pared back their estimates for the next announcement. In fact, over the past three months, the consensus earnings estimate has plunged over 16% to $10.13 per share. On top of this, institutional buying pressure (an indication of a stock’s risk-to-return ratio) has plummeted lately, and I cannot ignore this in good conscience. Which brings me to my final recommendation for AAPL…

The Bottom Line

So AAPL is not a stock that I would buy at this time. While the stock had a fantastic run from 2009 to 2012, the cellphone and tablet market are starting to get saturated and Apple is still clearly figuring out how to deal with the shift. So in the near-term, I see more risk than return ahead for this stock.

To be clear, I’m not saying Apple is a bad company. It’s a legendary innovator and the stock I get asked about most for a reason, and it’s a company I will continue to watch. It has an attractive yield, the $10 billion stock buyback program could be expanded, and there is the impending iPhone 6 announcement. If buying pressure picks up in anticipation of these events, we may get a chance to buy again for good profits.


Louis Navellier

Louis Navellier

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