6 reasons Apple won't rally in 2012

Everyone seems to love the stock at this price. That's a problem.

By Motley Fool Pick of the Day Dec 21, 2011 4:51PM

By Rick Aristotle Munarriz

 

There's never a shortage of Apple (AAPL) bulls. The world's most valuable tech company is percolating globally and IS cheap by most historical measuring sticks.

 

There isn't a lot of suspense here. A whopping 50 of the 55 analysts following the company have the stock rated as a buy or strong buy. Does that worry you? It certainly concerns me.

 

Barclays Capital analyst Ben Reitzes isn't leaving the herd, issuing a note this week detailing the six reasons that the class act of Cupertino will rally next year. I'm not entirely sold on the proposition, so let me go over what can go wrong with each of his six catalysts for big gains in 2012.

 

New iPad is coming
The original iPad came out in April of last year. The iPad 2 followed 10 months later in February of this year. It would be a shock if Apple doesn't hit the market with an updated tablet early next year.

 

Yes, the iPad 3 is going to up the ante. Reitzes sees a stronger processor, better cameras, and Siri voice recognition. It will sell well, but is the iPad 3 going to be strong enough to provide the kind of material gains that the iPad 2 had over the initial spurt of Apple's first tablet?

 

This won't be a slam dunk. Keep in mind that Apple didn't have Amazon.com (AMZN) selling millions of Kindle Fires at $199 when earlier iPads hit the market. Analysts have actually been in the rare position of scaling back iPad 2 sales projections this holiday quarter.

 

 

Apple is likely to respond with a calculated price cut. Reitzes and I agree on that front. Introducing the iPad 3 starting at the historical $499 price point -- but keeping the entry-level iPad 2 model around at $399 -- makes sense. However, what if it's not low enough to encourage the buyers of much cheaper tablets? What if the market for tablets will follow the trend of Android outgunning Apple in smartphone market penetration?

 

The iPhone reach is growing
A year ago, only AT&T (NYSE: T ) customers had access to the iPhone in this country. Today, smartphone buyers have actual choices. However, Apple's real growth here will come from overseas. China has embraced the device for its high-end consumers, and other companies have been bitten by the bug.

 

This sounds like a rosy scenario, but let me revisit data from sales tracker Gartner that details worldwide smartphone sales during this past quarter.

 

Q3 Handsets

Q3 2011 Share

Q3 2010 Share

Android

60.5 million

52.5%

25.3%

Symbian

19.5 million

16.9%

36.3%

iOS

17.3 million

15%

16.6%

RIM

12.7 million

11%

15.4%

Bada

2.5 million

2.2%

1.1%

Microsoft

1.7 million

1.5%

2.7%

Source: Gartner.

 

Ouch! Did Apple's iOS actually lose global market share? Yes, it's a growing pie. Apple handset estimates actually rose by 28% over the past year. The overall smartphone market simply grew faster. Perhaps more important, some will argue that the third quarter was a fluke. Apple stunned investors with weaker-than-expected iPhone sales, largely because everyone knew that the iPhone 4S was coming during this quarter. Apple should bounce back, but for now it's hard to argue that the iPhone is the platform of choice when Google's (GOOG) Android is eating its lunch.

 

The iPhone 5 is coming
Were folks disappointed with the iPhone 4S, or simply disillusioned that Steve Jobs wasn't there to tell them that they wanted it? We know that next year's shiny new iPhone will be better. It will feature a new design, be more powerful, and likely come with several features already found in Android phones, including 4G LTE connectivity and NFC chips for mobile transactions.

 

However, Apple doesn't get better in a vacuum. Everyone else doesn't stand still. Android's already working on a rival to Siri's digital assistant. Microsoft (MSFT) is paying handset leader Nokia (NOK) billions to back the software giant's fledgling mobile operating system. Apple's iconic smartphone will get better, but clearly so will everyone else. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

 

New Macs are on the way
Global PC sales have been stagnant all year. We're seeing a different scenario play out in this realm. Apple's actually gaining market share here, but the pie isn't growing much.

 

Apple's Mac and MacBook renaissance can be traced a decade back to the introduction of the iPod. The company experienced the halo effect, where success in one category influenced the buying decision in others.

 

Well, iPod sales have been shrinking for several quarters. The real halo here has been the iPhone and to a lesser extent the iPad. And some will even argue that the success of tablets and smartphones as "good enough" computing devices is what is actually eating into PC sales.

 

Well, where does the halo go now that Apple is losing market share in the tablet space to Android gadgetry and Android has overtaken iOS on smartphones? If Microsoft paying Nokia billions to champion Windows pays off, does this mean that even Microsoft has a halo waiting?

 

TVs
Rumors of a full-blown Apple television by the end of 2012 keep inching toward reality. A new category will clearly be incremental to Apple's model. If we consider that iPhones and iPads may double as slick remote controllers, a successful iTV may don a halo effect of its own.

 

Apple can make this work, but it won't be easy. Folks won't upgrade their TVs every year or two the way they do with iPhones and iPads. Logistically speaking, Apple stores will have to sacrifice some selling space of other gadgets -- and a lot more warehousing space in the back -- to make room for larger TV displays. It's also hard to picture folks carrying out heavy and gargantuan television boxes from the stores.

 

I'm on record as liking this move, but PC makers and tech companies have bombed in earlier efforts to cash in on the bigger screens. It will pay off for Apple, but at a much slower adoption clip and with thinner margins than the rest of its lines.

 

Dividends make sense
There's too much cash snoozing on Apple's balance sheet, but what else is new. Even if Apple comes through with a dividend announcement, will this really help the stock? If anything, it may signal to the market that the Cupertino giant needs to appeal to income investors because the past few years of heady growth are over.

 

Yield chasers may have applauded when Microsoft initiated a dividend policy nearly nine years ago, but the stock has been a dud since then. Do you really want that to be Apple? The meatier the yield, the more concerned investors will be about Apple's internal growth projections.

 

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. The Motley Fool owns shares of Microsoft, Google, Amazon.com, and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft, Amazon.com, Google, and Apple. Motley Fool newsletter services have recommended creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

11Comments
Dec 21, 2011 8:22PM
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Let's talk numbers.  AAPL is up about 23% for the year and should be up to about another 5-10% after earnings next month.  The S&P is at negative 2% or so.  Even if you bought this Jan and sold in Feb, that 5% is probably more than the S&P will do in a year.  Even if AAPL's return is halved next year that's still around 14%.  What's your suggestion for a stock that will do that?    
Dec 21, 2011 6:39PM
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I have to agree, this article is not saying anything about Apple market share losing or dropping but more about growth. I don't think they will contrinue or keep growing anywhere near as much as they have been in the past.
Dec 21, 2011 7:02PM
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Pedestrian reasoning at best, you should visit the new Apple store in Hong Kong (if you can get inside) or the one in Shanghai.  Insatiable demand for Apple products in China.
Dec 21, 2011 8:27PM
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Additionally, the proprietary position of Apple these last few years would make the old Microsoft blush (pay for the right to develop an app and then another 30% when forced to use the AppStore - and don't even try to give me the ensure the quality of the app line. Apple has become the monster they always claimed Microsoft was, ironic.
Dec 21, 2011 8:39PM
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I agree with the article. I am bone tired of having to read through 64 pages of legal documents from Apple every time that I want to download a free app. It is interesting that in the ads about Apple vs Windows, there is a "cool guy" and an "**** retentive" guy. Apple says that they are the cool guy but in actual fact, they are the other. Steve Jobs is dead and so will Apple be unless they can improve their customer relations. Ever try to load iOS5 and get the "Network timed out message" - yes, I and several million others did. If Apple can't provide the services they should be offering, they are going to be history. It will be interesting to see what happens in 2012, I wouldn't be surprised to see a resurgence of RIMM, after the press has tried to drive a really good product into the ground!!
Dec 21, 2011 8:27PM
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I can see why Apple is so popular in China, the country nurtures the same lemming mentality you see with Western Apple sycophants. Apple used to pride itself with separation from such the mass hysterics, now they embody it.

Dec 21, 2011 9:58PM
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Huh, rally, AAPL has steadily risen for just about every month for the last three years ( further back even better) so where's the needed rally? Its basically been all uphill. Idiot.Confused
Dec 22, 2011 5:29PM
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The Kindle is a piece of crap.  Read the recent article about the thousand's that are being returned to Amazon as fast as they ship.  Amazon has promised fixes.  I guess they will ship them to the Kindle Fire owners and throw them over the fence.  Get real and learn the facts before writing all the BS that is in in your article.  You bet against Apple, smart people won't.  Here' to Steve Jobs.
Dec 21, 2011 8:41PM
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Androids open development and the ability to deploy and distribute applications from anywhere is the death knell for Apple.

 

Steve Jobs has moved toward the light, Apple will soon follow.

Dec 21, 2011 8:45PM
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Finally, (I know, right) the crap-shoot quality of Apple products and incredibly high service costs will make the Apple TV a nonstarter. I have drawer full of Ipods that are completely worthless (mostly crashed hard drives).
Dec 22, 2011 12:47AM
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Just another Apple Hater.
His logic fails in many areas.  OF COURSE the IPad lost market share...when you have 100% of a market you have no where to go but down...just ask HP about Tablets...they tried and got burned bad...Apple just hums along.  I mentioned I would get a new iPad next year when the 3 came out, several of my coworkers asked me immediately if they could buy my Ipad1 (Top of the line version---they actually began to bid!  Too bad for them it will stay on the family,  The new iPod Nano came in the mail today, it is a gift for my significant other, the little square one and a watchband that holds it so you can wear it like a watch.  But of course iPod sales have slow, since the iPad and the IPhone both contain the software and can be used as an iPod you don't really need a separate device though I expect the watch iPod to be a hit with the hubby.  Both my nephews number one most wanted gifts are Apple Computers or Pads.  My brother is getting an Macbook air for Christmas from his wife.  We all were PC we have all seen the light, my iMac has not had a lick of trouble in two years, no PC was ever that reliable.
I like my Apple TV box, gave them to everyone last Christmas and they all love them.
My company software has some incompatibility with Apple, mostly in printing, but still most keep switching over, even t he tech guy uses Apple at home.

I find TruBlu's comment about Apple Quality being a crap shoot and his 'drawer full of iPods" at hime.  Uh Dude...if they suck so bad why did you keep buying them so that you now have a "drawer full"?  You keep buying a product that you think sucks?  Hmmm...that does not compute!
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