Can Apple’s Growth Problem Be Fixed?
The company’s ability to maintain its growth momentum has been a huge point of debate for watchers of Apple (NASDAQ:AAPL). Are the iPhone maker’s main markets saturated? Can the company’s products keep attracting repeat buyers? Can it leverage its cultish following to stay as crazily profitable in the coming quarters as it has been in the past few?
No one has a certain answer to any of those questions, of course, but there are several industry watchers with ideas on what direction Apple needs to take to stabilize its stock in the near future and remain a good investment for stakeholders in the longer term. According to UBS analyst Steve Milunovich, the key for Apple will be in maintaining the “stickiness” of its platform to take advantage of the “lock-in effect.”
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This is what will separate it from some of the recent bust or almost-bust tech stories, including Research in Motion (NASDAQ:RIMM), Nokia (NYSE:NOK), Sony (NYSE:SNE), Nintendo, and Google (NASDAQ:GOOG) unit Motorola.
“The iPhone isn’t a phone, it is a portable computer that brings consumers and developers together through iOS,” Milunovich wrote in a note to investors, according to Barron’s. “The use of iCloud, purchase of apps, and existence of Apple families makes switching inconvenient. The company’s success is creating a new generation of users such that iOS is the new Windows.”
However, Apple needs to create “higher barriers to exit,” the analyst added, because rivals such as Amazon (NASDAQ:AMZN) and Google were increasingly threatening the iPhone maker’s ultra-successful products. “For example, Amazon just announced the launch of the Amazon MP3 store optimized specifically for iPhone and iPod touch,” the analyst added. “We think Google’s apps for the iPhone are better than Apple’s. The battle of the MSPs is upon us.”
Milunovich, who did reiterate a Buy rating and a $700 price target on Apple in his latest note, also mentioned the growing investor concerns that have led to the stock losing almost 30 percent of its value over the last four months.
The “tone of our recent investor conversations has gone south along with the stock price,” he wrote. “On a recent marketing trip, the glass was about 65 percent empty and 35 percent full.”
The UBS analyst concluded that further downside may be required to make a final bottom for the stock. Why? Firstly, at 42, Apple was not oversold when it came to the relative strength index. Then, short interest-to-float was only 2 percent, and sell-side opinion, “possibly a contrary indicator”, was still largely bullish with over 80 percent analysts at Buy. What else?
What was not of a huge concern right now was the state of the iPhone maker’s product margins. While margins will fall over time, especially if they are as high as Apple’s, profitability can still be maintained.
“The argument [of falling profitability] may miss the point that Apple creates great value from commodity parts,” Milunovich wrote. “One could say that McDonald’s (NYSE:MCD) marks up beef and sugar water but adds a fair amount of value along the way. The Mac (computer, not hamburger) has maintained better-than-industry profitability for many years.”
The key, Milunovich stressed, was that Apple needed to keep innovating.
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