James Max: Apple shares will fall, the fruit is rotting


LBC Radio presenter James Max explains why a combination of decreasing innovation, increasing competition and no Steve Jobs is spoiling the Apple core

As a fanatic, it pains me to say this: the Apple bubble is about to burst.

The company’s shares are too expensive. Their market dominance is unlikely to continue. Meanwhile competitors are catching up and the level of innovation has slowed.

The big problem is that Steve Jobs was Apple and Apple was Steve Jobs. His passing has never been reflected in the share price. Investors have yet to come to terms with the influence this incredible man had on the technology industry.

It’s taking a while to filter though, but the company is suffering now that he’s no longer with us. That’s not to say Steve Jobs was the only reason Apple became the mega success we recognise today. Of course there are many talented individuals within the company. The ethos he created lives on. Nor am I suggesting that one of the world’s biggest companies won’t be here in 10 years’ time. 

There is a view that the rare quarterly earnings drop at Apple represents a buying opportunity. Indeed, ahead of a new product launch where many prospective iPhone purchasers will be awaiting the next generation, future earnings will jump. The Apple machine will roll on again. In the short term, performance is likely to improve.

It’s the longer term I am concerned about.

I am a fully paid up member of the Apple fan club. iPad, iPhone, Mac Pro. Check, check and check! The products are integrated, the design is exceptional, the reliability is first class, the usability is a unique selling point and desirability remains.

But there are dark storm clouds ahead and the biggest storm is likely to surround the launch of the iPhone 5.

Eagerly awaited for a September rollout, it’s widely expected that the standard connector will be changed. Sources suggest that the 30-pin connector (the bit at the base of the phone which connects it to the power lead, into speaker docks etc.), first introduced in the iPod 3 back in 2003 will be dropped.

So what? You may say.

So all your add-ons are rendered useless should you upgrade. This presents an issue for Apple aficionados who have long coveted the compatibility of devices as they are launched. Because aside from a spangly new design, what will the iPhone 5 do that the 4S cannot?

For a company established 1 April 1976, the growth and numbers are staggering.

With revenues approaching $110bn, and a market capitalisation approaching $540bn, this represents a comfortable multiple. There’s a lot of equity in the company and the brand remains as popular. The recent trading figures are a short-term hiccup. Dig down into the sales figures and you’ll realise that the problems are a little more serious than slowdowns ahead of new product launches or challenging economic conditions.

The iPad sales at 17 million, and 26 million of iPhones look fine, but the average selling price has dropped. Not just due to currency movement but also because more of the basic or older models are being sold. And while sales are down by 6% in Europe, it’s the drop in Chinese sales that should be of concern since other manufacturers are increasing both sales and market share. 

I have no doubt that at its launch, the iPhone 5 will generate hysteria, queues at every store and reaffirm Apple as the world’s favourite mobile telephone provider. But haven’t you noticed, since Steve Jobs has not been at the helm, innovation has been thin on the ground?

Where Steve was an innovator, his successor Tim Cook is a production manager – efficient at supply but lacking in creative genius.

The iPhone I have now isn’t much different from the one I had a few years ago. The iPad 3 wasn’t much different from the iPad 2 and the leaps of technological capability have slowed dramatically. The camera was a bit better – it could do 1080HD images rather than 720p – but the zoom remained at 5x, the battery life a bit longer, the connection speeds a bit faster and the screen was a bit sharper.

Although to house the changes, the iPad 3 is actually a bit thicker than its predecessor at 9.4mm compared to 8.8mm. The changes were welcome but not ground breaking. No reason to bin your iPad 2 in favour of the next iteration. Technological leaps have become tiptoes.

And there’s the core of the problem: the incremental developments of the products available are evolutionary rather than revolutionary.

As time passes, it becomes easier for other manufacturers to emulate and improve upon what has been an incredible franchise and leap forward. And if Apple is what you want to buy, the older products represent greater value since they do pretty much what the new kit does – at a fraction of the cost.

The premium prices that consumers are prepared to pay rely very much on the products being launched having a significant advantage over their cheaper competitors.

To date, they have. However this is changing.

While Apple was perceived to be driven by the vision of one man, the world’s leading smartphone manufacturer has no such celebrity visionary at its helm. Yet Samsung is making the running. In 2011 it overtook Apple as the world’s largest smartphone maker and this year it overtook Nokia as the world’s best selling mobile telephone brand.

Innovation is the key to any technology company’s success. Just look at the rise and subsequent fall of Sony. Back in the 1980’s it dominated. The Walkman was everywhere. It was the brand to own. Yet competitors quickly caught up and Sony lost its way. And that is what could happen at Apple. The pricing metrics for the shares reflect a market position and incremental increase in revenue.

But as technological advancement slows, and innovation subsides, so unit prices and profit margins will be cut. Revenues are up, although not by as much as analysts had predicted. However, it’s earnings per share are what you should look at: forecast for $10.26 but coming in at $7.65. Volume and sales may be holding up but margins are being pressurised.

This isn’t a blip. It’s the beginning of a trend.

Will consumers be prepared to fork out for iTV (not our commercial broadcaster but the integrated Apple integrated TV that’s been talked about so much)? Only if it’s so innovative that it’s a game changer.

Will those who have an iPad 2 or 3 be persuaded to buy the next version just because it’s launched? The simple answer is no.

Apple fans will remain Apple fans. Products will still be purchased and the company has plenty to shout about. However, if there isn’t a game changing product launch in the next 18 months, prepare for the share price to fall and margins to be squeezed. Competitive market conditions could be about to take a byte out of Apple.

James Max presents Weekend Breakfast every Saturday and Sunday mornings on London’s Biggest Conversation, LBC 97.3 FM. He is a qualified surveyor and worked in property and finance for 15 years. After working for one of the country’s leading property advisory firms, he completed healthy stints in investment banking and private equity, before becoming a candidate on The Apprentice, which launched a career in broadcast media. Visit JamesMax.co.uk.