Apple: The Way Forward

Growing up as a boy, I was taught by my IT lecturers that Bill Gates and Microsoft (MSFT) was the “in-thing”. Apple’s (NASDAQ: AAPL) Macintosh was casually described by many as some relic from the early computer development age of the 1970s. They were, as far as I was concerned, prehistoric and only used by technology nerds or dinosaurs who had failed to move with the times. How wrong could I have been? Given the current demand for the superior design and high functioning of the iPhone and iPad, it is now Microsoft that looks to be the relic of the modern computer war.  The legacy that Steve Jobs has left for Apple is nothing short of a symbol of a generation. Revolutionary, captivating and, for the teeming number of users and shareholders, the best thing to emerge since Windows arrived on our desktops during the 1980’s. Even with the premature death of its founder, the craze for Apple products does not seem to want to let up now that the baton of responsibility has been passed on to Tim Cook.

Recently, Apple launched the latest in the series of its products, the “New iPad”. Unexpectedly, this was not named the “iPad 3”, deviating from the ascending numerical format of successive models that consumers had become familiar seeing with the Apple iphone. As expected however, this product began selling out in stores within minutes of the commencement of sales and store owners were struggling to keep up with demand during its first few days on sale.

The innovations, which started in 2006 with the birth of the iPhone, have undoubtedly led to an explosive growth in the financial fortunes of Apple. With burgeoning cash reserves and a market capitalization of over $600billion, Apple is arguably the richest company in the world. Recent analysis suggests that it now has larger cash reserves than the entire US treasury, something that reflects the power that this individual company wields within the largest economy in the world. This has also ushered in exceptionally good times for investors as Apple’s share price has hit new record levels, trading at around $605.

The going is very good at the moment, but the question must be asked, how long can it keep outperforming the rest of the market? The major problem that Apple may now be facing with its revolutionary products is the copy-cat tendency for new technologies to be rivaled very quickly.

Take the new iPad as a case in point. Is there really anything ‘new’ in the ‘New iPad’? I think curiosity is what is still driving sales here, but it is possible that ‘iPad fatigue’ may set in given the sheer competitiveness in the technology market. The emergence of new competitors offering similar, lower cost, tablet technology is an example of where this may occur. Also, Apple has some big rivals who have the market power to take a huge share of the market if they create the right tablet. Amazon (AMZN) is a good example of a strong competitor moving into position to expand its kindle in to tablet technology.  Furthermore, it will not be long before people look for the latest exciting product within the industry. The tight hold that Apple hold over its Itunes and applications may also prove unattractive in light of the free-flowing android-based hardware  supported by Google’s (GOOG) android market.

Even with all the hype and innovation, the iPhone has been slow to catch on in the developing World, which has been the life-support for Research in Motion’s (RIM) Blackberry. It is true that the world has been stunned by the iPhone and the iPad but it will take something really extraordinary to maintain sustained demand in its products. If you look at the iPhone 4S, it is obvious that it did not captivate the market  as much as previous models did. Apple must be wary of competitors such as Nokia (NOK) and Samsung who are proving that they can at least match, if not better the technology and glitz that Apple’s products offer. This has been proven with Samsung winning the prestigious ‘phone of the year’  at the T3 awards.

Do I recommend Apple as a buy at this point? I think prices have gone too far for any reasonable investor to try to profit from a bullish run without a sizable correction. The only factors that would propel a bull run at this stage are the quarterly reports and, in particular, the sales numbers. Considering that the market expects the company to outperform, any slowdown would be a major shock. These are the key figures that will tell us if interest in Apple’s products are continuing higher, have reached a plateau or are showing signs of dropping off. I believe the interest in Apple’s products will hold firm in 2012, but it is very difficult to see this continuing in 2013. Investors should not lose sight of the fact that Apple is involved in several lawsuits with its main competitors who produce devices based on the Android operating system.

Apple is a proactive and forward-thinking company. However, although it is possible given the company’s history, it may prove very difficult for Apple to offer another significantly iconic device in line with expectations. Apple may also falter with its lack of penetration in the developing world which at the moment is fairly poor relative to its competitors. The Android devices have taken a very firm foothold, primarily due to price, and it will be difficult to displace their popularity. Apple needs to reverse this trend to keep shareholders smiling and to maintain an expansion in handset sales beyond 2012.