3 Risks Apple Inc. (AAPL) Faces Going Forward
Apple Inc. (NASDAQ:AAPL) is currently doing extremely well. The company’s financial performance has continued to improve, hitting record profits in the most recent quarter. Apple has also continued to refresh its product line, while pushing out new products, among them Apple Watch, which is coming soon. However, despite the current success, Apple is also prone to certain risks that could significantly hurt its share price and things any long-term investor should consider.
For even the most positive on Apple Inc. (NASDAQ:AAPL), it always helps to invert, and consider the risks. The enterprising investor should always consider the opposite and be exposed to different opinions.
Reliance on iPhone sale for revenue
Most of Apple Inc. (NASDAQ:AAPL)’s revenue comes from iPhone sales. In the most recent quarter, the company generated $51.182 billion or 68.6% of its total revenue from the iPhone line. Apple’s second largest revenue contributor is the iPad, which generated $8.99 billion in revenue in the most recent quarter, coming at a distant second place after the iPhone.
Given Apple Inc. (NASDAQ:AAPL)’s huge reliance on iPhone revenue, the company could be adversely impacted if iPhone sales growth declines or both unit sales and margins begin to shrink. Any adverse development in iPhone sales is bound to affect Apple’s profitability, as well its stock price. That explains why it is important to keep a closer eye on the smartphone market trend, especially potential threats to iPhones from flagship Android hardware.
Apple’s greatest risk from deriving so much revenue from one product, is the speed of change in the field in which it operates at. Technology moves fast and companies such as BlackBerry have learned that the hard-way.
iPad sales slowdown
Apple Inc. (NASDAQ:AAPL)’s iPad business is ailing. Generally, tablet sales have declined and analysts have projected that tablets could continue to suffer from the rise of the larger screen smartphones, known as phablets. In the most recent quarter, Apple registered a 22% year-over-year decline in iPad sales. If the iPad continues to perform poorly, Apple’s risks could be amplified if the iPhone business also slows down.
There are a number of retorts for the iPad decline and CEO Tim Cook has dismissed such concerns as a blip. Cook may be right in the larger scheme of things, but time will only tell. Several unique factors play into the iPad market like a longer replacement cycle than the iPhone and the fact that new apps have not yet pushed consumers to upgrade many of those tablets just used for email and web browsing. More time is needed to see what will happen over the longer-term.
Uncertainly over Apple Watch
Analyst estimates have shown that Apple Inc. (NASDAQ:AAPL) could sell between 7.5 and 31 million units of Apple Watch in the first year. However, competing smartwatches have only managed to sell a fraction of the numbers predicted for Apple. It is unclear the average selling price analysts are assuming for Apple Watch devices. However, if analysts project higher numbers beyond what Apple can achieve, the result could be a downward move in share price as well as future estimates.
It’s difficult to project Apple’s success or failure with the Apple Watch as the category is so new, that most analysts let alone consumers don’t even know what to expect. Apple may need time to get the Apple Watch right. Just think of how the first iPhone compared to even the second.
Therefore, as much as Apple Inc. (NASDAQ:AAPL) looks strong, with its product line, the company isn’t without risks. This is not to say Apple can not and will not overcome these risks. Apple is not the only company that derives most of its revenue from one product.
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