On Wednesday shares of the world’s most valuable company (in terms of market capitalization) Apple, Inc. (AAPL) shed 4.2 percent of their value, or roughly $4.36 USD per share to reach a closing value of $98.94 USD. The drop was worst since Jan. 28, 2014 when shares dropped $71.17 USD (roughly 8.0 percent or $6.19 USD per share, effectively, based on the recent 7-to-1 split in Q1 2014).
I. Drop it Like It’s Hot
The drop shed a whopping $26.1B USD in (market capitalization value) — more than many large companies’ entire market cap. On Thursday, after a rebound, losses have continued with shares trading down roughly 1 percent, erasing another $6B USD or so in value.
January’s drop followed its calendar Q4 2013 (fiscal Q1 2014) earnings. While Apple grew across the board, sales of its iPhone 5C mid-range smartphone were weak, as were sales of the 7.9-inch iPad Mini. Hence iPad and iPhone sales missed the ambitious targets set by analysts.
[Image Source: SoManyMP3s]
By contrast yesterday’s drop came at a time when the upcoming earnings report was a source of optimism and hope among investors. Instead, Apple finds itself struggling to answer questions about security and innovation that could undermine its lucrative business model.
The first question lingered around growing celebrity anger over the hack of multiple female celebrities’ iCloud accounts, hacks that resulted in the release of nude pictures. Apple admitted that a targeted attack by hackers compromised the accounts of “certain celebrity accounts”, but said that it was not due to a “breach” of the iCloud or related accounts. Rather it claimed the hack was due to “a very targeted attack on user names, passwords and security questions” indicating a brute force or spear-phishing attack on the affected users’ iCloud accounts.
Jennifer Lawrence was among the celebrities whose account was penetrated by the iCloud hack.
[Image Source: Kevin Winter/WireImage]
Reportedly many celebrities weren’t buying Apple’s efforts to deflect blame onto them, and concern grew that the mounting anger could manifest into a backlash against the company’s products and services.
Second, concern mounted after Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) announced a number of buzzed about items at the IFA 2014 (Sept. 5-10th), including the big surprise — the Samsung Gear VR Innovator Edition.
This was the fruit of its new partnership with Facebook, Inc. (FB), which recently purchased virtual reality super-startup Oculus VR. Available “this fall” for an unspecified price, the headset marks a growing alliance between the internet’s top social network and the world’s top device maker.
For Apple investors the concern is perhaps not so much that the Samsung Gear VR will sell like wildfire (although it would certainly be a headache for them if it did). Rather the concern may stem more from the perception that Apple is trailing Samsung in terms of hardware innovations. Even as Apple looks to try to one-up Samsung’s established smartwatch brand, Samsung appears to be a step ahead, expanding the “Gear” family to include yet another wearable.
The Gear VR is expected to retail for a premium of around $300 USD, according to one estimate by CIO.com, which expects it to be sold exclusively in carrier bundles with the companion 5.7-inch Galaxy Note 4, priced at around $500 USD for both devices on contract.
Samsung also reinforced its status as an elite smartwatch innovator, introducing yet another device — the Gear S. The Gear S is Samsung’s long-awaited Tizen OS smartwatch that can make and receive phone calls — which ships in October at an undisclosed price. The watch packs support for S Health and Nike Inc.’s (NKE) Nike+ — apps that mirror at least some of the supposed selling points of the upcoming iWatch.
Samsung Galaxy Note Edge
Last, but not least, the quirky curved-screen 5.6-inch Galaxy Note Edge turned heads for being innovative, if a bit too gimmicky. Samsung’s increasing penchant for creative designs and risk taking has some Apple investors more than a little nervous.
A final factor dragging Apple down may be the rumor that the iPhone 6 will carry only 1 GB of DRAM in its 4.7-inch variant. If true, this would be a rather crippling limitation given that most premium Android smartphones feature 3 GB of DRAM, a memory allotment mobile developers are making increasingly liberal use of.
The 4.7-in. iPhone 6 is rumored to pack a paltry 1 GB of DRAM. [Image Source: Feld @ Volk/Mac Rumors]
Commenters in the generally pro-Apple Forums section of MacRumors were largely blasting Apple’s decision, if the rumors prove true. Apple may yet bump the memory ration to 2 GB, but if it doesn’t it’s going to alienate many loyal fans, it appears.
II. Most Valuable Ever
In Aug. 2011 Apple’s late CEO and cofounder Steven Paul “Steve” Jobs stepped down from the CEO spot of the company he founded for the third time in its then three-and-a-half decade history. Investors went wild. In after hours trading, shares of Apple stock bucked their long climb, falling as much as 7 percent during after hours trading.
In his dying days Steve Jobs masterminded what seemed a clear blueprint for his successor, Timothy Cook. [Image Source: Jesus Diaz/Gizmodo]
Mr. Jobs would continue working from home for Apple until Oct. 4. A day later he died of respiratory failure. Apple share prices had climbed in roughly 7 percent in the month before his death, but they shed most of those gains in after-hours trading on the day of his death.
But Mr. Jobs had left his hand-groomed successor Timothy Cook with a clear roadmap which included potential future products like a smart TV and wearable “iWatch”. Apple’s latest product, the iPad was only a year old and it was deep in the throes of wild growth. And Apple’s overall portfolio was just getting started sales-wise in many large electronics markets, such as China.
At the market close on Oct. 6, 2011, Apple had a market cap of $351B USD on share prices of $377.37 USD per share ($53.91 USD effective price per share with recent split) at the closing bell. It had become the most valuable company in the world earlier in Aug. 2011, passing Exxon Mobil Corp. (XOM) (a feat analysts had widely predicted since Q1 2011).
Using that plan Apple CEO Timothy Cook made Apple the most valuable company ever. [Image Source: AP]
A year later — and ten months after the death of Steve Jobs — Apple achieved an even more incredible feat, passing Microsoft Corp.’s (MSFT) December 1999 record of $615.34B USD nominal (inflation adjusted) high to become the most valuable company of the modern era in terms of nominal market cap.
That value was achieved after a 64 percent rise in Apple shares, with the record-setting share price set at $665.15 USD per share on Aug. 20, 2012 ($95.02 USD per share adjusted for recent split). Later than month shares would reach $702.10 USD per share ($100.30 USD per share adjusted for recent split), for a market cap of $649.52B USD.
Some analysts predicted bullishly that by 2013 share prices would hit $1,000 USD per share. Instead, 2013 saw a modest depression in share prices amid a global slowing of high-end device sales which stunted Apple’s growth trajectory.
III. Market Saturation — iWatch, 5.5-in. iPhone Phablet Face Tough Slog
But shares have been on a tear in 2014 since January’s hiccup as new of larger screen iPhone phablets and the long awaited “iWatch” smartwatch approach. Apple is expected to launch a 5.5-inch iPhone phablet (the iPhone 6) and its sports-geared smartwatch at a Sept. 9 press event on a community college campus in his hometown of Cupertino, Calif.
The 5.5-inch iPhone 6 phablet is expected to have a high-end spec that includes potentially a sapphire-glass screen, an Apple A8 SoC, and a new and improved camera.
But Apple’s device faces a tough challenge given the deep entrenchment of LG Electronics, Inc. (KRX:066570)(KRX:066575) and Samsung in the phablet space. Samsung’s Galaxy Note product is in its fourth iteration and carries a nearly impeccable spec. Apple will have to fight fire with fire. It can do it, but it won’t be easy. Apple also has to worry about the 5.5-inch LG G3 Stylus and the 6-inch Samsung Galaxy Mega 2.
The Galaxy Note 4 — the reigning king of the phablet market
Rumors about the iWatch have varied greatly, with some arguing it will have a square or round flat face, and others arguing it will have a curved display. Either way, one thing’s for sure — it faces a tough task selling in the face of so many established rivals.
If Apple is going to make a killing on the iWatch, it will have to stand out from a growing pack. Sony Corp. (TYO:6758) has long been producing smartwatches. In March Google announced a new build of Android, called Android Wear. Android Wear devices were out in force at IFA 2014, with models including the €199 (~$260 USD) ZenWatch from ASUSTek Computer Inc. (TPE:2357), the LG Electronics’ G Watch (announced in June) and G Watch R (just announced); Samsung Gear Live (a third-gen design announced in June), and the $250 Moto 360 smartwatch from the Lenovo Group, Ltd. (HKG:0992).
The LG G Watch R
Microsoft is also rumored to be launching a smartwatch wearable in Q4 2014. Even HP is reportedly coming out with a fashionable smartwatch.
Apple has some high-end talent behind its product, surely. But sales volume will likely be predicated on price, and Apple’s desire to offer a haute fashion, sensor-packed iOS wearable may conflict with its ability to release it at a price for the masses.
Surely, the iWatch will sell and make some profit for Apple. But for investors, the chief concern should be what kind of volume Apple can achieve. In the worst case iWatch sales may follow in the line of iPad sales: increasingly feature-packed but high-price products struggling to make a mark in a market saturated with intriguing, lower-priced alternatives.
IV. Can Apple Turn the iPad Around?
Speaking of which, iPad sales will be a keenly scrutinized section of Apple’s Oct. 20, 2014 fiscal Q4 2014 (calendar Q3 2014) earnings report release, given comments Mr. Cook made last month about sales hitting a “speed bump”. After seeing strong growth in 2014, iPad sales have for consecutive quarters fallen short of their levels they achieved a year ago.
Apple might be able to assuage investors with a modest October revamp of the iPad line with iterative improvements such as the Apple A8 processor, Touch ID, 802.11ac wireless, etc.
The hotter question is whether rumors of a 12.9” iPad Pro model are true. The device is rumored to be aimed at an early 2015 launch and will look to take on the Surface Pro 3, perhaps bringing to bear the full potential of iOS 8’s split-screen multitasking functionality. The strongest evidence that this product is truly on its way comes from the supply chain. A recent Bloomberg report claims that there are signs that suppliers are already gearing up to produce the larger tablet.
However, some of the strongest tablet sales are not in the large form factor, but rather in the smaller, cheaper tablets. Cost cuts have reduced the price of used first generation iPad Minis to ~$200 USD, about the same price as the larger first generation Microsoft Surface tablet.
But with a plethora of Windows and Android tablets available from the likes of Samsung, Lenovo, Acer, Inc. (TPE:2353), Xiaomi, ASUSTek, LG Electronics, Inc. (KRX:066570)(KRX:066575), Dell, Inc., Hewlett-Packard Comp. (HPQ), and Toshiba Corp. (TYO:6502) Apple is in danger of getting lost in the crowd. Perhaps most dangerous is that these rivals are pushing brand new tablets with solid basic hardware for prices as low as $80-150 USD.
HP’s Android tablet can be found for around $80 USD — about 2.5 times less than a two-year-old iPad Mini.
A pricey iPad Pro is either a genius bucking of the mainstream trend, or a flawed foray. Only time will tell which it is, should the device launch.
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