If recent trends continue, Apple Inc. (AAPL) could be the worst-performing mega-cap name in the fourth quarter. Let’s take a look at some potential reasons why the stock continues to pull back.The Meteoric Rise and Troubling Fall
Leading up to the big release of the iPhone 5, Apple’s shares increased by 74% from the beginning of 2012, hitting an all-time high of about $705 in September. Since then, the stock has declined by 21%. Part of the pullback could’ve been due to unrealistic expectations for the new iPhone (which was released the day AAPL hit all-time highs).
The stock has continued to lose value on a fairly consistent basis. In fact, Apple shares fell almost $25, or -4.3%, on Wednesday alone. This trend continued today with apple down another 20 points or so, marking the seventh down day for Apple in the last nine trading sessions. Let’s examine some potential factors behind why Apple continues to fall.1. Two Straight Weak Quarters
When Apple’s third quarter ended, it reported results that left Wall Street analysts very dissatisfied. The stock’s earnings increased by 17% to $8.8 billion, or $9.32 per share. Revenue also increased from the previous year, coming in at $35 billion. However, analysts expected much more for the quarter, estimating EPS of $10.35, and revenue of $37.2 billion.
At that time, Apple had an earnings forecast for its fourth quarter of $7.65 per share, with revenue of $34 billion. Analysts expected EPS of $10.22 and revenue $38 billion in the next quarter.
When fourth quarter earnings were announced late last month, net income came in as another miss for AAPL. Analysts were expecting earnings of $8.75 per share, but actual earnings were only $8.67 per share. However, the company did manage to beat estimates on their Q4 revenue, reporting sales of $36 billion, beating expectations of $35.8 billion. Still, two straight quarters of EPS misses never bodes well for any stock.2. Declining Tablet Market Share
In the third quarter of 2010, when Apple released its first iPad, the company held an astonishing 93% of the tablet market share. At the time, it seemed that Apple was untouchable, but as competitors including Samsung and Amazon began to jump in, its powerful market share began to fall.
Apple’s market share had declined to 73% by the fourth quarter of 2010. Less than a year later, in the third quarter of 2011, the company lost even more of its market share, falling to 59.7%. In the third quarter of 2012, market share was just 50.4%, nearly a 46-point decline from the its market share two years prior.
Samsung has become Apple’s leading competitor in the tablet industry with its Galaxy Tab 2. Its market share has increased drastically in the past two years, going from a 6.5% market share to 18.4%.
During the third quarter of 2012, Apple shipped 14 million and Samsung shipped 5.1 million of the 27.8 tablets shipped during that period. Trailing behind them were Amazon, shipping 2.5 million, and Asus, who shipped 2.4 million of their tablets. Apple’s still the leader in the tablet space, but it’s no longer head and shoulders above the competition. With new Microsoft-based (MSFT) “Surface” tablets due this year, expect Apple’s market share to fall even further. This trend has to be concerning to investors.3. A Surprise Shake-up at the Top
On Wall Street, big internal changes for a company usually don’t bode well. Last month, Apple reported some major changes to their top management. The company noted that Senior Vice President of iOS software, Scott Forstall, would be leaving the company in 2013, and would be working as CEO Tim Cook’s advisor until then.
This change resulted in remaining top management, including Jony Ive, Bob Mansfield, Eddy Cue and Craig Federighi, taking on more responsibilities within the company. Additionally, it was noted that John Browett, who worked as head of retail would also be leaving the company. Tim Cook planned to oversee retail until a new manager was found.4. Struggles from Suppliers to Meet Quality and Production Demands
Since the release of the iPhone 5, Apple’s manufacturers have had a very hard time keeping up with demand for the product. Apple noted the iPhone is not an easy product to make, and it is important to make sure that quality is not compromised in the production process.
Shipping estimates for the phone have been around 3-4 weeks as the holiday season approaches. Concern over the balance of supply and demand could very well have played into Apple’s declines, as holiday shoppers must be wondering whether a new iPhone could arrive in their stocking by Christmas. If not, they may have to purchase a phone from one of Apple’s competitors instead.5. It’s Hard to Make “Revolutionary” Products
When Apple introduced its first iPhone to the market, it was something completely new and exciting to consumers. Making calls, texting, and taking pictures on phones were available on phones before the iPhone, but once this new gadget entered the market, a whole bevy of new features became the new norm. Full touchscreen. No physical buttons. A simple, compelling operating system including a good web browsing experience. These features had never before been seen, and even with a steep asking price, the iPhone became the number one smartphone in the world without much difficulty.
Then in 2010, the first iPad was released. Essentially, the iPad was a larger iPhone that couldn’t make phone calls. However, the iPad made it easier for people to do things they previously did on their computers in a more convenient and mobile way. The tablet market was essentially born with this device, and Apple quickly dominated tablet market share (as mentioned previously, that market share has dwindled in recent years).
So Apple reinvented the phone with the iPhone and reinvented the computer with the iPad. What’s next? Well, that’s exactly what investors are wondering. Can the company pull another rabbit out of its hat, or will its product release cycle be relegated to incremental updates of existing devices?The Bottom Line
No one can predict the future, but a clear bearish trend in Apple shares has emerged over the past several weeks. Investors should proceed with extreme caution regarding AAPL shares. While the company has seen extraordinary success in the recent past, it faces real threats to its business growth. Its recent share price decline reflects just that.
Apple Inc.(AAPL) is not recommended at this time, holding a Dividend.com DARS™ Rating of 3.4 out of 5 stars.