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Four Reasons on Why To Avoid the Apple Stock

Apr 7 2014, 8:10am CDT | by , in News | Apple

Four Reasons To Avoid Apple Stock
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Four Reasons on Why To Avoid the Apple Stock

Apple shares have lost 25% of their value since peaking in September 2012. In the first quarter of 2014, they’ve fallen 5%. This does not mean the shares are inexpensive — I see four reasons why investors should avoid the stock.

Apple declined to comment.

This is not to say that Apple does not have strengths. For one thing, it has a market capitalization of $474 billion and $159 billion in cash. Moreover, despite an 11% drop in profit in the last year, it still sports a very attractive 21.3% net profit margin — meaning that $37 billion worth of its revenues dropped to its bottom line.

But it is no accident that Apple stock keeps falling. What made Apple an icon was the return of Steve Jobs as CEO in 1997. Three times in a row — MP3 players (iPod), cell phones (iPhone), tablets (iPad) – he was able to introduce a much better product experience for big consumer markets.

Under Jobs, Apple created not only beautifully designed products but also great content (through the iTunes and App stores), retailing, marketing, and customer service. Apple also outsourced hardware manufacturing at the lowest unit cost in the industry while charging the highest prices.

So why should investors avoid Apple shares?

1. Tim Cook

Since August 2011, Apple’s CEO has been a meticulous supply chain manager — an outstanding foil for a creative genius like Steve Jobs.

Unfortunately, the consumer tech business is not a railroad or an electric utility that is highly regulated and changes slowly, if at all. Any competitor in the consumer tech industry is only as good as its last innovative product.

It does not take much time for competitors to copy innovative ideas. And startups are always coming up with new ideas — some fraction of which threaten to undermine the temporary beach heads that big companies like Apple enjoy.

Under Cook, Apple has yet to introduce a new industry-transforming product. In the last seven years of Jobs’ reign, Apple’s revenues grew at an average rate of 44%. Since then, Apple’s revenues have grown much more slowly — 26%. And that growth rate is decelerating fast — its revenues rose a mere 9% in the last year.

One glimmer of hope from Cook is that he seems to be squeezing as much profit as possible from the iPhone. Cheaper iPhones designed to take share from rivals sold a record 51 million units in the quarter ended December 2013.

2. Weak new product portfolio

Is the problem here just a lack of patience for Apple to come up with the next big thing? Even Apple bulls do not offer anything exciting.

People have been talking for years about an iWatch or iTV — neither of which have boosted its shares.  Introducing a TV set-top box, negotiating with Time Warner Cable about adding video content, or exploring a smartwatch are all ho-hum ideas.

But without a product genius running things, it is hard to expect much more out of Apple.

3. Losing market share

For a company that is so dependent on the iPhone, its loss of market share is discouraging. Strategy Analytics reports that the iPhone grew 13% in 2013 — much more slowly than the smartphone market’s 41% increase. Apple’s market share fell from 19% to 15% while Samsung nabbed 32% of the market.

4. Overvalued shares

Apple sales are expected to slow down even more in the next couple of years. Bloomberg calculates that analysts expect Apple’s sales will be up a relatively modest 6% in 2014 to $181 billion and another 6% in 2015 to $192 billion.

When it comes to profit growth, it is difficult to see why Apple’s Price/Earnings ratio of 13 makes sense. After all, its earnings are expected to grow a relatively modest 8% and 9% in 2014 and 2015 respectively, according to Zacks.

One thing that would change my views is to replace Tim Cook with a visionary CEO who can breathe new life into Apple’s innovation DNA.

Trip Chowdhry managing director of Global Equities touts Jonathan Rubenstein — who helped invent the iPod — for that slot. Can he take over where Steve Jobs left off?

 

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<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

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