Apple Faces Competition

Apple (Nasdaq:AAPL) delivered a mixed first quarter performance. Analysts were worried that Steve Jobs’s death in October 2011 would hurt the tech giant, and some of their worries seem to be justified. Apple’s stock has fallen 35% since it touched its peak last fall. New products have done well in terms of reporting sequential and annual growth, but some of them, such as Apple’s tablets, are losing market share to competition. For the health of the industry, competition is good. 

Apple’s Financials

Apple’s Q1 revenues grew 17% over the year to $54.5 billion, falling short of the market’s projected revenues of $54.9 billion. EPS of $13.81 remained flat over previous year’s earnings but managed to exceed the Street’s targeted EPS of $13.55 for the quarter.

According to IDC, during the last quarter, worldwide tablet shipments grew 75% over the year and 74% over the quarter to 52.5 million units. Apple’s iPad retained its leadership with shipment growing 48% over the year to 22.9 million units driven by the release of the new smaller iPad, the iPad Mini, and the upgraded version of the existing iPad. Despite growth, Apple’s market share slipped from 52% a year ago to 44%. Korean player Samsung was the second-largest tablet vendor, with 7.9 million units shipped worldwide. Samsung saw their market share expand from 7% a year ago to 15% during the quarter. Samsung’s products are based on Google’s Android.

Within the phone segment, Apple fared better. Last quarter, Apple shipped an estimated 17.7 million iPhone units in the U.S., compared with Samsung’s 16.8 million units. This was the first quarter ever that Apple surpassed Samsung’s sales in the country. Within the U.S., iPhones now hold 34% of the market compared with Samsung’s 32% market share. During the last quarter, Apple sold 47.8 million iPhones worldwide.

Sales of other products continued to decline. Last quarter, Apple sold only 4.1 million Macs and 12.7 million iPods compared with 5.2 million Macs and 15.4 million iPods sold a year ago.

For the current quarter, Apple estimates revenues of $41 billion-$43 billion, falling short of the Street’s target of $45.4 billion.

Apple’s Product Upgrades

Apple continues to work on newer products to add to their portfolio. This week, Apple will release the high-capacity iPad. The new version for the fourth generation iPad will feature 128 GB of memory space. Apple is targeting corporate users with the high-capacity model, but it may be a tough market for Apple to compete in. For the new tablet to be adopted by the corporate world, Apple will need to work with Microsoft to ensure there is a compatible Office version for iOS. Further, Windows 8–based touch screen laptop options will continue to grow during the year, giving corporate users an option to get a tablet that will run smoothly for Windows and Office applications. The new iPad is expected to come with a price tag of $799 for the Wi-Fi model and $929 for the Wi-Fi plus cellular model, which could be a deterrent. The average price for a corporate laptop is $703.

For Apple’s growth story to continue, it can no longer ignore the potential of emerging economies like China. Over the last year, Apple has invested heavily in opening stores and entering into contracts with network carriers in China. Sales from China grew 67% over the year during the last quarter. Compare that with sales in Americas which grew 15% over the year, and in Europe where sales grew 11%. But analysts believe that the growth in Chinese revenues is coming at lower margins. China is the world’s largest smartphone market, but, it also has a preference for low-cost products. According to market rumors, to cater to this market, Apple is working on a cheaper version of the iPhone 5. The new phone is expected to be made out of plastic instead of aluminum, but it will feature a retina display and a new lightning Connector for charging and syncing the phone.

Besides devices, Apple is also expanding their content reach. They are said to be in talks with HBO to add HBO streaming to Apple TV by the middle of this year. Currently, HBO viewers can watch content on Apple devices through the HBO Go app, which is available to them only when they subscribe to HBO through their cable provides. It appears that Apple is looking to enter into a direct agreement with HBO so that viewers don’t have to subscribe to the channel through a cable provider. At present, besides the iTunes library, Apple’s set-top box lets viewers stream content from services such as Netflix, Hulu, YouTube, the National Basketball Association, the National Hockey League and Major League Baseball. Analysts are also expecting Apple’s own Smart TV to come out this year. Apple has remained silent on the subject.

iOS Competition

According to a Gartner report, at the end of the third quarter last year, Android not only retained but indeed expanded its leadership in the mobile OS segment. Android OS reported a 72% market share during the quarter compared with 53% a year ago. Unfortunately for Apple, the iOS share contracted from 15% a year ago to 14% during the quarter. Apple’s performance was significantly better than BlackBerry’s, which saw its share slip from 11% a year ago to 5% in the quarter. Microsoft, though, is picking up, with market share improving from 1.5% a year ago to 2.4%.

Recently, both Microsoft and BlackBerry have been working on significant mobile OS improvements. BlackBerry’s much-awaited BB10 was released last week to rather mixed reviews. Windows Phone 8 was released last quarter, and Nokia’s Lumia 920, which uses the OS, has received very positive reviews. Analysts don’t expect BlackBerry to regain its lost ground in the future, but the market is hopeful of Microsoft picking up and giving Apple a tough market to grow in. According to IDC, Android phones commanded 68% of the market last year. Their share is projected to shrink to 64% by 2016 as phones based on other operating systems become popular. iOS phones will improve marginally from 18.8% in 2012 to 19.1% in 2016. The big growth is expected to be seen in Windows Phone OS growth, where market share will grow from 2.6% in 2012 to 11.4% in 2016. Despite the BlackBerry 10, RIM’s share is expected to decline from 4.7% in 2012 to 4.1% in 2016.

Apple’s stock is trading at $442.32 with a market capitalization of $415.36 billion. It touched a 52-week high of $705.07 in October 2012.