Back to top

Is Apple Truly Rotten to the Core?

Read MoreHide Full Article

On July 20, 2015, Apple Inc. stock (AAPL - Free Report) closed on the day valued at $132.07 per share, a price just below its all-time high of $133 per share back in late February 2015. Nearly one year to the date, shares of Apple are down just about 27.6% from their all time high price. As of June 17, 2016 at 12:54 PM ET, AAPL was down 1.97% during early afternoon trading and valued at $95.64 per share.

APPLE INC Price and EPS Surprise

APPLE INC Price and EPS Surprise | APPLE INC Quote

The first few months of 2016 for Apple were quite troubling, to say the least. Back in late April of this year, the tech giant known for being an innovator posted very disappointing fiscal 2016 second quarter earnings results.  Apple reported earnings of $1.90 per share, which missed the $1.97 Zacks consensus estimate, and revenues of $50.6 billion that also fell short of the $51.5 billion expected in the Zacks consensus.

The results of the company’s earnings report resulted in shares dropping by as much as 8% following its earnings release.  This represents a loss of over $40 billion dollars in AAPL’s market capitalization.  To put this into perspective, Apple lost more money during one day of trading than the market caps of companies such as Tesla Motors (TSLA - Free Report) ($31.79 billion) and Yahoo Inc. ($35.52 billion).

(Also read “Apple Lost More in Value Today than these 7 Companies are Worth”)

To make matters worse, sales of Apple's premier product, the iPhone, were weaker than expected -- 51.2 million iPhones were sold in Q2, slightly lower than the expected 51.5 million. This sales decline for the highly popular device represents a fall of 16% year-over-year. Just to put the significance of iPhone sales into perspective, the device accounts for about 60% of Apple’s total revenue – it’s that important.  Furthermore, sales in China during the quarter were also down 26%, which may speak to any number of the following factors: a sluggish Chinese economy, relative market saturation of iPhones, a stronger dollar keeping iPhones more expensive, etc.

Speaking of China, Apple’s relationship with the nation continues to be testy. Apple stock trading down during Friday trading can be linked to a regulator of intellectual property in Beijing ordered the company to stop selling the iPhone 6 and iPhone 6 Plus in the city. The reason cited to the ceasing of iPhone sales is that the phones’ designs are too similar to a Chinese phone.

(For more information on the matter, please read “Apple Shares Slide in Friday Morning Trading After Another International Setback”)

Apple is in difficult spot. The business model of “a new iPhone every year” is over saturating the market and didn’t translate to increased sales for the company’s fiscal 2016 second quarter. In addition, when was the last time Apple came out with a “game changing” device? Has Apple lost its ability to be technology trend setters? Is Apple truly rotten to the core?

Trying to determine if Apple is no longer able to be inventive is rather difficult because there are far too many unknowns involved. We cannot foresee the “next big thing” until it actually becomes a phenomena. However, Apple may want to consider some basic adjustments to their business model to get them back on their feet, adjustments more than the hot take of “just create something new” – that’s a lot easier said than done. Here are three simple suggestions:

1. Develop a cost effective computer.

Anyone who owns an Apple computer, whether it is a laptop or desktop, knows that their computers are quite expensive. One of the more “inexpensive” devices Apple sells is the MacBook Air, which starts off at $899 for the 11-inch model and $999 for the 13-inch model. The prices listed do not include any sort of upgrades to the specs or add-on applications such as an Adobe Systems (ADBE - Free Report) product like Photoshop.

Looking at the competition, you can purchase a Hewlett Packard (HPE - Free Report) laptop on (AMZN - Free Report) running on Windows 10 – a Microsoft (MSFT - Free Report) product – for basically half the price. Not only is this HP laptop half the price, it also has the same, if not better, specifications as the MacBook Air: same 8 GBs of RAM, same duel core i5 processor, more physical memory, and a larger screen.

It’s safe to say that the majority of individuals use their computers to access email, surf the Interwebs, and log onto their Facebook (FB - Free Report) accounts – i.e. “the basics.” Why spend $900 or $1,000 on a laptop when you can do all your basic computing on another laptop with virtually the same hardware at half the price? Developing a new computer that is cost effective that isn’t a tablet is one way to bring in new customers who want an Apple computer, but don’t have an extra $1,000 to spend on one.

2. Provide better student discounts.

Speaking of new customers, what better market to exploit than upcoming college freshmen, or just college students in general? Apple does offer student discounts, but it is a complete farce, to say the least. Remember those MacBook Airs in the previous section? Well, if you fall under the conditions to receive an education discount, you can purchase either the 11-inch or the 13-inch devices for $849 or $949, respectively.

That’s right, students only save a grand total of $50 off of the basic model of these specific devices. This isn’t just an isolated instance either. All devices Apple sells do not have any notable student discount. A $50 savings is not even 10% of $899. The student discount doesn’t have to be substantial; potentially no more than 30% off any device, for example. The price of the products will of course be lowered, but the amount of devices sold, ranging from cell phones to laptops, should in theory make up for the price cut.

3. Cut down on the number of new iPhones

Last but not least, Apple’s primary sales driver: the iPhone. Since 2010, there has been a new iPhone released every year. What makes this situation worse is that the devices released are not completely new iPhones, but rather upgrades on the old model. To clarify what I am talking about, here is a list of the iPhones released since 2010:

  • iPhone 4: June 24, 2010
  • iPhone 4S: October 14, 2011
  • iPhone 5: September 21, 2012
  • iPhone 5C, 5S: September 20, 2013
  • iPhone 6 / 6 Plus: September 19, 2014
  • iPhone 6S / 6S Plus: September 25, 2015

So, what are the differences between the iPhone 5 and 5C or the iPhone 6 and 6S? Quite frankly, not much. However, that’s not to say there are no differences. The issue is that these differences, along with the price of these cell phones, do not elicit enough of a demand to upgrade. Do a larger screen and an upgraded retina display warrant a new phone roughly one year later? That’s debatable.

Two simple solutions to flooding the cellphone market with iPhones with very few notable differences are to have a longer wait between the release of the new iPhone and not have those “5S” filler devices between the release of the iPhone 5 and iPhone 6. Doing this will increase the demand of a new iPhone considerably. Furthermore, the upgrades will also appear more drastic and significant to the consumer.

Final Thoughts

Again, these are just simple suggestions that Apple can do to get it back on its feet again. In order for the company to reclaim its place as technology innovators, they will obviously have to develop a new device or technology that alters the current status quo. So until that time comes, trying to find ways to increase its customer base is the way to go.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

More from Zacks Stocks in the News

You May Like