Apple's stock is in a funny place right now.
After a big moonshot, it's fallen back to earth. And now it's locked in this mid to low $500-range.
Analysts who had been universally bullish are reconsidering their positions and cutting price targets.
What's wrong?
I think it comes down to the fact that Apple created and captured a once-in-a-lifetime opportunity with the iPhone.
And, the era of explosive iPhone growth has drawn to a close, at least at the current iPhone price points.
Apple will continue to grow earnings and profits nicely. The company will remain robustly healthy. But the mind boggling days of 125% EPS growth and 82% revenue growth are over.
Why?
Why can't Apple just recreate the miracle with a new product--the iPad Mini, for example, or a fantastic new TV?
Because the iPhone was a nearly perfect business at a nearly perfect time for Apple. And those don't come along very often.
Google's search business is and was a magic money machine. People are doing billions of searches, and Google very simply places a few discreet ads at the top and side of the search results. The ads aren't intrusive, and are often very helpful. It's an incredible business.
For Apple, the iPhone has been a magic money machine. Thanks to carrier subsidies in most developed countries, consumers pay an affordable $200 for the phone when they sign up for a two-year contract. Apple, however, collects $650, with carriers covering the other $450. This is perfect for Apple. It gets mass-market pricing and premium pricing. Plus, its customers come back every two years to get a new phone. And, thanks to Apple's manufacturing efficiency, the company's profit margin on the phone sales is extraordinary.
This magic money machine led to Apple's sales exploding from $37.5 billion in 2008 to $156.5 billion in 2012. That insane sales growth led to Apple's insane stock growth.
But, Apple's money machine has largely run through its opportunity.
In the last couple of years, as the explosive growth in the smartphone market has shifted to lower-priced phones in emerging markets, Apple's iPhone has been smoked by Android in market share. Globally Android has 75% of the market, according to Gartner. In the U.S., Apple has about 50% of the market, according to Kantar.
Apple has produced record profits and sales even with a small amount of market share, but that's only going to get harder in the future.
The smartphone market is still a huge opportunity, but for Apple, there are limitations. The next phase of growth is coming from older, poorer people around the world. It's unclear if those people are willing to buy expensive iPhones. The carrier subsidy model isn't as popular elsewhere in the world.
If Apple does want to address the low-end of the market with a cheaper iPhone, it presents its own set of problems. It could make a $200 phone, but Apple's sales wouldn't necessarily skyrocket since a cheaper phone would bring in less revenue and less profit. It could also cannibalize sales of the high-end iPhone.
In short, a cheaper iPhone brings market share, but at a cost to Apple's revenue and profits.
We can see this dynamic playing out with the iPad Mini, which is selling well. It's going to affect Apple's sales and earnings. Apple makes less money on each iPad Mini sold as compared to a big iPad. Therefore analysts are dialing back their estimates for Apple next year.
Speaking of the iPad, it's important to note the difference between the iPad business and the iPhone business. The iPad is not a magic money machine. It's just another PC. No carriers are subsidizing the iPad. So its profit growth will pale in comparison to the profit growth of the iPhone. And an iPad, because its $600, is less likely to be upgraded every other year.
CEO Tim Cook needs to pull a Steve Jobs and invent that next product to keep investors happy. But the catch is that there is probably no other product as perfectly profitable as the iPhone.
For the longest time we've heard Apple's next big product is going to be an Apple television. Supposedly the Apple television is coming next year.
TVs are replaced every eight years, which is quite different than Apple's iPhone, iPad, and Mac lines. Gene Munster estimates Apple could capture 5-10% of the TV market in year one, which would add 4-8% to the company's revenue. Over time it could kick in more, but a TV will never be as lucrative as an iPhone.
One thing Apple investors are waking up to, in other words, is that the iPhone's amazing run is winding down. And that there may never be another iPhone.
See Also: The iPhone 5S Is Coming Next June, And It's Going To Be In 6-8 Colors
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