Apple's Worst Nightmare

Before you go, we thought you'd like these...
Before you go close icon

Opportunists must be drooling.

Apple (NAS: AAPL) has fallen in back-to-back weeks. The world's most valuable tech company surrendered 4.5% of its value two weeks ago, followed by an even crueler 5.3% slide last week. The stock is trading 11% below the all-time high it established earlier this month.

That's Exhibit A.


Then we have Apple's upcoming fiscal second-quarter report. The iEverything company reports after Tuesday's close. Apple rarely misses. That's Exhibit B. There are times when the stock has sold off after a blowout quarter, but that's typically when Apple's stock has run up ahead of the report in anticipation of a monster showing.

Exhibit A is on a collision course with Exhibit B, and the end result for Apple fans is Exhibit C -- I told you so.

Beyond Wednesday's likely pop
We know that Apple sold a ton of the new iPads it introduced last month. The sequential comparison will get hard for the iPhone -- pitted against the iPhone 4S introduction during Apple's holiday quarter -- but it will clearly be a lot more smartphones than it handed over a year earlier.

Bears would be nuts to argue that Apple is in for a soft quarter. It's equally as insane to argue that Apple -- now fetching a mere 12.9 times this fiscal year's projected profitability and just 11.3 times next year's forecast -- is somehow expensive.

However, there's also a reason analysts see revenue growth slowing from a hearty 49% clip this year to a more modest 19% uptick in fiscal 2013.

Apple is rolling right now, but there are a few question marks about its future.

Barbarians at the iGate
Five years ago, Apple was all about Macs and iPods. That accounted for just $11.2 billion -- or 24% -- of the $46.3 billion that the class act of Cupertino rang up during this fiscal year's freshman quarter. Macs are gaining market share, but at lower average selling prices over the past year in an industry that's been generally flattish lately. It's been even harder for iPods, as Apple's once iconic line of portable gadgetry has been posting year-over-year declines for more than a year.

This leads us to the glitzier world of iPads and iPhones. Unit sales more than doubled in both categories during the holiday quarter, and iPads and iPhones combine for nearly three-quarters of Apple's revenue.

If anything should derail either of these chugging locomotives, Apple would be vulnerable. It doesn't seem possible, but let's eyeball one scenario.

Microsoft's (NAS: MSFT) clawing back into favor. The poster child of The Lost Decade isn't necessarily on fire right now. Revenue climbed a mere 6% in its latest quarter. Investors are simply starting to grow excited about the prospects of Windows 8.

As the software giant's first PC operating system developed with tablets in mind, Windows 8 will breathe new life into Windows watchers. Laptops with detachable screens that transform into touchscreen tablets are a safe bet to be the hot sellers of 2013. Instead of the Android and iOS tablets that are being used primarily for surfing the Web and streaming media, Windows 8 tablets will raise the bar on productivity with seamless Microsoft Office integration.

Apple has educated the market on the joys of owning a tablet. What if Microsoft's lesson is that tablets aren't just toys or classroom e-readers?

Partners are rebelling
Apple isn't the top dog in smartphones. Android is the global leader -- and growing. Bulls will argue that Google's (NAS: GOOG) market leadership with its open-source platform doesn't matter. Apple is the one commanding the lion's share of the industry's profitability.

That is certainly true, but it also comes at a price.

RadioShack (NYS: RSH) also reports quarterly results Tuesday. Analysts see the small-box retailer earning just $0.05 a share, a sixth of what it earned a year earlier. Why are margins getting crushed here? RadioShack blamed it on certain smartphones during a horrendous holiday quarter.

The company didn't call out Apple specifically, but wireless carriers are tiring of having to take a roughly $400 hit on every subsidized iPhone that they sell. Sure, they can make that back on two-year contracts, but it's a far more lucrative deal for carriers with cheaper smartphones. It also seems as if iPhone owners are quick to upgrade after the two-year pacts run out, forcing carriers to repeat the subsidized process.

Verizon (NYS: VZ) , the country's largest wireless carrier, seems to have had enough.

"It is important that there is a third ecosystem that is brought into the mix here, and we are fully supportive of that with Microsoft," Verizon Wireless CFO Fran Shammo said during last week's call.

As BlackBerry devices fade in popularity, carriers are hoping that cheap Androids and functional Windows Phone handsets eat into the iPhones. It's not about favorites. It's about what's best for their bottom lines. With Microsoft also giving developers a thicker slice of app sales, the application coders who put Apple's App Store on the map and gravitated to Android when it became the mass-market leader are also secretly rooting for Microsoft to matter.

The one thing the bears are missing
The grim scenario isn't pretty for Apple. The tech bellwether will have to either sacrifice margins by cutting prices or relinquish market share.

Proud bulls will argue that Apple is better off taking the high road. Apple is, after all, a premium brand. However, what happens as developers flock to the larger Android audiences and the meatier revenue-sharing potential of Windows? Apple's been there, you know. That was Apple in the 1990s.

However, what the bears are forgetting is that Apple innovates. It swings from vine to vine as if it's the Tarzan of innovation, giving us the iPod in 2001, the iPhone in 2007, and the iPad in 2010. It's a safe bet that the iTV will come in 2012 or 2013. Good luck guessing where Apple will go next. As opportunities dry up, Apple will be there to carve out new ones. That's not misplaced optimism. Just as Macs and iPods went from being essentially all of Apple's business five years ago to less than a quarter of the revenue mix today, why can't iPhones and iPads be replaced by something even better to the point where they are making up just 24% of the tech star's business?

Apple will be challenged later this year by Microsoft. Don't laugh. It's really going to happen, even if it's not evident for another year or two. In the end, Apple will find a way to excel. Apple will wake up from its nightmare, rub its eyes, and start working on a new dream.

Apple jacks
The next trillion-dollar revolution will be in mobile, but the best investing play isn't necessarily Apple. If you want to cash in on the upcoming trend, a new report will get you up to speed. Yes, it's as free as this article, but it won't last forever, so check it out now.

At the time this article was published The Motley Fool owns shares of RadioShack, Google, Apple, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Google, Microsoft, and Apple and creating bull call spread positions in Microsoft and Apple. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Longtime Fool contributorRick Munarrizcalls them as he sees them. He owns no shares in any of the stocks in this story and is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners