7/29/2011 3:37 PM ET|
How Apple hurts the tech sector
A hot company often helps drive its sector. But Apple's dominance is a phenomenon that hasn't been seen -- and its fortunes will have an unprecedented ripple effect.
Last month, Apple's quarterly results stunned even the optimistic watchers on Wall Street. Eschewing the usual kabuki dance where a company magically beats the analysts' consensus estimate by a penny or three, Apple reported second-quarter earnings of $7.79 a share, oceans past the $5.85 estimate.
Shares of Apple surged after the report, clawing above $400 before falling back. After the earnings announcement, several gobsmacked analysts rapidly upped their 12-month price targets above $500 a share.
Often a hot company helps drive its sector. For instance, Apple's 1980s success with the Macintosh sparked a personal-computing revolution that spawned many successful companies.
But Apple has become so dominant that it is becoming more of a threat -- rather than a sentiment booster -- to the rest of the technology sector. That isn't to say investors should ignore other tech players -- they just aren't as likely to see the same kind of upside that Apple enjoys.
To be sure, plenty of companies, such as Qualcomm (QCOM, news) and Arm Holdings (ARMH, news), ride the Apple coattails. But that can be a dangerous game. Apple has become a sort of Wal-Mart of tech land, able to drive tough bargains with suppliers as it builds dominant positions in key device markets.
One of its advantages is delivering sexy products at price points that don't break the bank. And gadgets tend to get cheaper over time, which means Apple will have to squeeze suppliers more if it wants to retain its profits.
Apple, now second only to Exxon Mobil (XOM, news) in terms of market value, wields its power with companies big and small. Adobe Systems (ADBE, news), a software giant and maker of Flash, has found it challenging and expensive to penetrate Apple's world.
Apple, of course, does face challenges. Analysts fret that mobile carriers won't keep pace with the demand Apple's devices are creating. Component shortages could slow manufacturing. And Apple has gotten so huge that maintaining its torrid growth rate won't be easy. The stock isn't terribly expensive, trading at about 15 times trailing earnings, which is less than the S&P 500's 16 times trailing earnings. But one profit blip could change that in a hurry.
Research In Motion (RIMM, news), which essentially invented the smartphone market, has taken a beating. Trading at near $70 in February, the BlackBerry maker is now in the mid-$20s. Shares of Nokia (NOK, news) have been halved since February, and the former handset king has reached out to Microsoft (MSFT, news) in a bid to leapfrog into a stronger smartphone position. (Microsoft owns and publishes MSN Money.)
Apple faces stiff competition in the phone market, primarily from Google (GOOG, news) Android phones made inexpensively out of Asia by companies like Samsung Electronics and HTC. But Apple is countering with cheaper versions of its iPhone.
Tablet makers aren't faring much better. CLSA, a research shop, estimates that Apple sold about 9.25 iPads for every Google Android tablet in the most recent quarter. This despite a proliferation of new tablets coming from Research In Motion, Hewlett-Packard (HPQ, news), Samsung and Motorola Mobility (MMI, news). As Apple has romped to record highs, Motorola Mobility shares have slid to $23 from $34 in January, and Hewlett-Packard shares have dropped to $36 from $49.
Perhaps the most disruptive aspect of Apple's strategy is the way it is reshaping the personal computer space. Apple's various Mac products are selling decently, but the emergence of the iPad has changed the PC calculus.
Intel (INTC, news), which reported strong earnings and record sales on July 20, remains upbeat about PCs (which use its chips). It pointed to 70% sales gains in Turkey and Indonesia during the quarter. At the same time, it trimmed back its overall forecast for PC sales. Mobile devices, chiefly the iPad, are rapidly eating into the segment.
And that will likely continue, perhaps faster than expected. Intel said after its earnings release that 86% of Fortune 500 companies are "testing or deploying" the iPad. PC backers had counted on the notoriously conservative corporate IT gatekeepers to move slowly on the iPad. Of course, "testing" could mean a few iPads in the executive suite, but Apple is clearly signaling that it is making headway with the biggest companies, the stronghold of PCs.
Not surprisingly, PC-centric stocks have not done as well as Apple. Intel's shares eased after its strong earnings, but they have risen 7% this year and are down modestly from May highs. Microsoft's shares are down 2% this year.
Both companies continue to be massive cash generators. But unlike Apple, they have had to deploy more of their cash in the form of dividends and buybacks to attract investors. Intel pays a solid 3.7% yield and bought back more than $1 billion in shares in the most recent quarter. Microsoft pays a dividend of 2.3%.
As Apple races to become the biggest stock in the land, it is swiftly becoming a sector unto itself. The non-Apple tech world is on its own.
|Tech at a glance|
|Company||Market cap||Sales growth over past 12 months||Net profit margin|
|Apple (AAPL, news)||$374 billion||52%||23%|
|Intel (INTC, news)||$121 billion||24%||25%|
|Microsoft (MSFT, news)||$236 billion||12%||33%|
|Research In Motion (RIMM, news)||$14 billion||33%||16%|
|Hewlett-Packard (HPQ, news)||$77 billion||10%||7%|
|Qualcomm (QCOM, news)||$94 billion||5%||32%|
|Google (GOOG, news)||$200 billion||24%||27%|
This article was reported by Dave Kansas for The Wall Street Journal.
VIDEO ON MSN MONEY
apple iphones are not even half the phone that the new androids are, apple is to controlling in what you can do with their phones there browser is not stable
I've had alot of problems with my iphones
Then Linux tried to make a push on the market and so Microsoft showed that they could make a decent OS with Windows 2000 and then they built XP using most of the core principles of Windows 2000. As soon as that challenge abated good ole Microsoft went right back to it's old self with vista.
Apple has taking it's fair share of lumps and bumps over the years and for all there hard work and dedication to building solid products its only fair that its Apples time to shine.There products do what they say there going to do, There OS is stable from one format to the next. Sure they have rules that limit certain things but all software does, that's the nature of software development.
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