Apple hot with consumers, but not investors

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Eric Risberg / THE ASSOCIATED PRESS ARCHIVES Apple CEO Tim Cook has watched devices using Google�s free Android software erode Apple�s lead in the smartphone market. (CP)

SAN FRANCISCO -- This holiday season is shaping up to be a record-breaking period for Apple as shoppers snap up iPhones and iPads. So why is the world's most valuable company losing its lustre with investors?

Apple began selling the iPhone 5 on Sept. 21, the same day the company's stock hit an all-time peak of $705.07 per share. Since then, the stock has plunged nearly 25 per cent, trimming the company's market value by more than $150 billion. On Wednesday afternoon, shares were trading at around $513.

The sell-off has had broad impact. It has reached beyond Apple's own stockholders because the company is the largest component in the Standard & Poor's 500 and Nasdaq composite index -- two benchmarks tracked by widely held mutual funds and exchange-traded funds, or ETFs.

Apple comprises four per cent of the S&P 500 and nearly 12 per cent of the Nasdaq, according to FactSet. The Nasdaq has shed six per cent since Apple's stock price peaked while the S&P 500 has declined three per cent, the same as the Dow Jones industrial average, which doesn't include Apple in its basket of 30 stocks.

Apple's abrupt descent is fuelling a debate among market-watchers. Is the stock now a bargain, as some would argue? Or is the recent markdown in Apple's value justified because the company has entered a phase of less innovation and slower revenue growth?

Disagreements over the issue are contributing to unusual volatility in the stock. Two weeks ago, Apple's stock fell 6.4 per cent, the biggest one-day drop in more than four years. Just a month ago, the stock surged 7.2 per cent for its biggest one-day gain in three years.

There's no consensus regarding the cause, but one thing is clear: There have been more investors eager to sell Apple's stock than buy it in recent months, despite all the evidence indicating Apple's products have never been more popular.

Perhaps the most popular theory to explain the recent downturn in Apple's stock is simple competition.

The hypothesis is that Apple's grip on the growing mobile computing market is loosening amid a wave of cheaper alternatives to the iPhone and iPad.

The iPhone's early lead in the smartphone market already has been surrendered to the more than 500 million devices running on the free Android software made by Google Inc. By comparison, as of the end of September, Apple had shipped 271 million iPhones since its 2007 debut.

Nokia phones running on the recently released Windows 8 system from Microsoft Corp. pose a new threat, especially in China, where Nokia has struck a deal with that country's largest wireless carrier. Meanwhile, struggling Research In Motion Ltd. is pinning its comeback hopes on a revamped operating system for the once-iconic BlackBerry to rekindle demand for that device.

Now, there are signs the competition is putting pressure on Apple in the booming tablet computer industry that it launched in 2010 with the release of the iPad.

In a report that likely contributed to Wednesday's steep drop in Apple's stock, research firm IDC predicted the iPad's share of the worldwide tablet market this year will decline to 54 per cent from 56 per cent in 2011. IDC said the iPad will dip below 50 per cent by 2016.

Meanwhile, the market share of tablets powered by Android, including Google's Nexus line and Amazon.com Inc.'s Kindle Fire, has climbed from 40 per cent last year to 43 per cent his year, according to IDC.

Windows 8, which is designed to run on tablets, also is expected to chip at Apple's lead and latch onto 10 per cent of the market by 2016, IDC said.

The popularity of smaller tablets with 18-centimetre diagonal screens and retail prices below $200 has already forced Apple to make changes. The company responded by introducing the iPad Mini, which features a nearly 20-cm screen.

The iPad Mini sells for $329, which helps Apple protect its profit margins and preserve its reputation for selling top-of-the-line products that merit prices a notch above the competition.

Nevertheless, the iPad Mini is undoubtedly diverting some sales from full-sized iPads, which sell at prices ranging from $399 to $829. That is one of the reasons BGC Financial analyst Colin Gillis expects the iPad's average selling price to fall by about $50 in the current quarter, which ends this month. That would be a nine per cent decline from the iPad's average price of $535 during the July-through-September period.

Even if it's no longer the market leader, the iPhone remains hotter than ever. Based on figures released by wireless carrier AT&T earlier this week, Jefferies analyst Peter Misek predicts Apple will sell 53 million iPhones this quarter, primarily the newest model.

That would be a more than 40 per cent increase from Apple's previous one-quarter record of 37 million iPhones set in the period covering last year's holiday shopping season.

-- The Associated Press

Republished from the Winnipeg Free Press print edition December 27, 2012 B11