Apple to lose market leadership – stock plunges


Apple logo

Apple’s stock dropped by more than 4% in early trading Wednesday, to as low as $556 a share, its lowest price in five months.

More significantly for investors, the stock is now down more than 20% in less than two months from its peak price of $705 a share on Sept. 21 when the iPhone 5 hit store shelves. This trading situation is commonly referred to as a bear market, with no bottom in sight.

For Apple, a combination of factors have plagued the stock over the past six weeks and continue to push down the price.

Supply Constraints

The stock’s initial downfall was caused largely by concern about supply constraints impacting sales of the iPhone 5. The stock began to decline after Apple reported lower-than-expected opening weekend sales for the device in late September, a fact that the company suggested was due to limited supply rather than demand.

Since then, CEO Tim Cook has assured investors that Foxconn, Apple’s manufacturing partner, has significantly improved production and will continue to catch up to demand. However, Foxconn’s chief renewed concerns Wednesday by noting at a business event that the manufacturer is still “falling short” of demand for the iPhone 5. 

Executive Shake-Up

Apple dropped a bombshell last week when it announced a big executive shake-up, including the departures of the company’s iOS chief Scott Forstall and retail chief John Browett. Apple shrewdly announced the move on a day when the stock market was closed because of Hurricane Sandy, but once trading resumed, the stock began to drop.

For investors, the announcement raised concerns about the stability of Apple’s elite management team without Steve Jobs, and the departure of Forstall in particular raised concerns about the future of Apple’s mobile product innovations.

Competition in the Tablet Space

A particularly negative research report about Apple’s dwindling dominance in the tablet market didn’t exactly help the company’s stock either. According to IDC, Apple’s share of the tablet market declined from nearly 60% in the third quarter of 2011 to 50% in the third quarter this year, showing just how much the competition has grown.

Declining Profit Margin

Apple is clearly working to maintain its hold on the tablet market with the release of a new smaller and cheaper iPad mini. However, the downside, as the company pointed out in its most recent earnings call, is that this and other new devices are expected to cut into the company’s profit margins.

Apple projects that it will report a much lower profit margin in the December quarter than analysts had previously expected. Cook attributed this to the prolific roll out of new products, which have higher costs, and the fact that some products like the iPad mini are being sold closer to cost. At the end of the day, Apple’s absurdly high profit margins for its product is the big selling point for investors. As a result, some analysts reacted to the news by cutting their price targets for the stock.

Patent Verdict

Most recently, the stock took another hit after a federal jury in Texas ruled that Apple’s FaceTime video chat feature infringed on several patents held by VirnetX, a patent holding firm. The court ordered Apple to pay $368 million and VirnetX could potentially push to ban sales of Apple products that use these patents.

All in all, it has been a tough few weeks for Apple even with the successful launch of several new products.

AAPL Chart

Image courtesy of Flickr, kevin dooley



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