Apple might not be as extraordinary as it once was. But it's still extraordinarily rich.
Since tipping $700 after the iPhone 5's debut last year, Apple shares plummeted to $500 this week, erasing a year's worth of gains, and it all comes down to three interconnected factors, which are as familiar to Wall St. investors as a Bloomberg Terminal screenshot: margins, market share, and moods.
Less alliteratively: As the untapped market for expensive smartphones gets smaller and more crowded with rivals, investors are concerned that Apple won't be able to grow its profit at the same rate it has during its tremendous race to $700.
"The biggest factor is that the margin profile of their business is under pressure, so they can't expect to make the same amount of money from their current product line" said Peter Misek, an analyst with Jefferies & Company. The iPhone isn't a high-margin phone. It's a ultra-super-premium-high-margin phone. In late 2011, Apple made up 75 percent of smartphone profits despite selling only 9 percent of the world's mobile units. That, friends, is margin.
But it's not 2011, anymore. Samsung has overtaken all rivals as the world's smartphone leader and Apple faces pressure to lower its prices to attract the next generation of buyers, rather than ask the same families to buy a new screen every year. You could say the world is eating into Apple's markets faster than Apple is growing new markets. Or you could argue that Apple has simply reached the natural bounds of growth. "The smartphone market in the developed world has basically hit 50 percent," Misek told me, "and once you've hit 50 percent penetration, you then have incremental growth, by definition."
Finally, moods. Apple is a victim of its own success. Of course it's unfair to point out that Apple hasn't invented the next Most Amazing Thing Ever™ in the last 12 months, but well, it hasn't, and the company's biggest moves have followed rather than led the market. The iPhone 5 got taller and thinner and faster to chase taller, thinner, faster mobile phones. The iPad got smaller and cheaper to chase smaller, cheaper tablets. Apple, which cultivated an aura of offensive innovation under Steve Jobs, has been put in the position of playing smart defense.
The worry that Apple has lost its magic touch hasn't been placated by the news trickling out of Cupertino. "There's a fear that sales [from last quarter] are going to be a little disappointing," Misek said. The Wall Street Journal recently reported that Apple orders for iPhone 5 screens were cut to about half what the company initially expected. Reports conflict on the exact figure, and Apple has been predictably reticent. Now there is a broad expectation that Apple will announce a year-over-year decline in earnings "for the first time in a decade" when it releases its earnings on January 23.
And yet, it's still Apple. The last decade's most impressive tech company still employs the vast, vast majority of the executive staff responsible for its recent successes (with at least one notable exception) and yet the stock's price-earnings ratio has fallen to 11, the lowest since late 2008. Retail investors worried that Apple is no longer an historically extraordinary company might not realize how extraordinarily rich it still is.