Apple of the investors’ eyes… NOT!

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Apple released its Q1’13 earnings yesterday with record quarterly revenue and profits of $54.5B and $13.1B respectively. The results are driven by record breaking sales of iPhones and iPads. Apple’s cash balance is now $137B. Of course, the creative folks are busy putting this cash balance in perspective.

However, all is not well for Cupertino powerhouse. The stock is down 10% in after-hours trading. The general layman consensus is that the wall street is greedy and the short-term negative outlook is pushing the stock down. Even well reputed reporters have publicly expressed their anguish towards the institutional investors. Read it here and here.

I think the investors are acting rationally. In finance speak, they fail to see the growth rates that would justify apple’s $600B market capitalization. They see the margin compression. etc. etc. From the strategic standpoint, I think following are two most important factors.

1. Products – The iPhone sales are slowing down.  As Gizmodo explains,  Apple products are still selling well, but they are stabilizing (which is a slow down). This may explain the iPhone parts order cut reported by the Wall Street Journal and the New York Times. iPhone is not the most darling smartphone anymore. The hardware capabilities, touch-control features, applications and even looks are pretty similar among smartphones from various vendors. Issues with the maps after initial release of iOS6 frustrated even the most devout Apple fanboys. Competitors are taking the right steps to foray into Apple’s territories. With its acquisition of Polish voice recognition company Ivona, Amazon sent a strong signal on its intent to wage a war on Siri. It remains to be seen on how Apple integrated the technology behind Authentec in its products.

Techcrunch reported last month that Apple lost its iPad market share by around 7% points during the holiday season. Don’t get me wrong – kids love their iPads and advertisers prefer it over any other smart device. But, the competition is working hard to ensure that they do top class job with their tablets.

2. Jobs factor – In last decade, new product innovation helped the Company build significant brand equity. Non-Apple fans were converted for a) to own the most amazing consumer device b) to get oneself acquainted with Apple ecosystem so that they have an easy migration path for next device and c) of course, be cool. The brand equity is at risk without any new product. What would it be – “True” Apple TV, Artificial Intelligence, tighter integration with commerce/Video/Education? Nobody would know till someone “accidentally” drops it at a restaurant. The fact is that Apple has to discover or create a new huge market to keep flying high and a million dollar question is whether Cook, Ive et. al. possess Steve Job’s vision to identify those unique opportunities.

Probably it’s time to accept that Apple isn’t a great growth stock anymore. It’s just a solid value stock.

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