In the land of consumer technology, it's hard to stay as the
king of the hill. Two decades ago,
ruled the roost, with its hot-selling Walkmans and Trinitron TVs.
About a decade ago,
looked poised to dominate the global cell phone market, and more
RAZR set that company up for a long-term run as a consumer
favorite. All those companies can now be seen in
Apple's (Nasdaq: AAPL)
With each passing year, Apple's brand only seems to get stronger.
Forget about this month's iPhone antenna glitch, which has pushed
shares down from their peak. Those kinds of issues are just noise,
and will soon be forgotten. But on a much broader level, there's
real reason for concern. Just as Apple is celebrating a successful
rollout of the iPad and the latest version of the iPhone, a key
competitor is set to steal Apple's thunder.
The competitor in question: well, it's a $155 billion (in market
value) company that made a name for itself in the field of Internet
search. Yes, just six miles up the road from Apple's Cupertino,
Calif., headquarters lies the campus of
Google (Nasdaq: GOOG)
-- the tech behemoth that has spent the last two years laying the
groundwork to beat Apple at its own game. And during the next few
quarters, get ready for a torrent of new products in all shapes and
sizes that run on Google's Android software. A host of new rivals
for the iPhone? Check. A host of new rivals for the iPad? Check.
Panasonic and others are now talking about adding Android software
to flat panel TVs. Google is even hinting that a range of
appliances found in your kitchen will soon have an Android browser.
Right about now, you can start to question whether Google can
develop software and services that are even more compelling than
those offered by Apple. They don't have to be. Good enough is good
enough. The key distinction is that Google's Android will be
ubiquitous. You'll find it on
Dell's (Nasdaq: DELL)
upcoming Streak tablet computer. You'll find it on Motorola's next
line of smart phones. And you can expect giants such as
Cisco Systems (Nasdaq: CSCO)
to start to embrace Android. In essence, Apple has created a closed
universe, and Google has created an open one. And in the world of
high-tech, open standards always win out.
Google can take is just one question you need to ask. The other
involves the impact on Apple's
presented by this rival that often gives its products away at low
or no cost. Apple's products typically garner a premium price,
which is why operating margins have expanded for six straight years
and now approach 30%.
Inevitably, Apple will have to price its products closer to the
peer group, which will likely eat into those robust profit margins.
And that's all you need to know about profit growth. If sales keep
rising but margins start to shrink, profit growth is likely to
Apple has boosted earnings per share by at least +33% every year
for each of the last six years. And it's on track to grow a heady
+50% this year, according to consensus forecasts. And then the
Google vortex is scheduled to rumble through town. Apple's new
starts October 1, which is right around the time that a whole new
set of Google-powered tablet computers, smart phones and perhaps
TVs are set to hit the market. Which is why analysts think
growth will cool to around +20% in fiscal (September) 2011.
Apple tends to handily exceed analysts' forecasts, so even as
headwinds build, Apple could still post a solid set of results in
But savvy investors always look ahead. And as they look beyond
2011, they'll start to see that it's a Google world -- and we just
live in it.
Action to Take -->
The technical issues regarding the iPhone are only temporary, and
once Apple announces a fix, shares could quickly move back toward
the $280 all-time high. But as the Google onslaught starts to
build, Apple's never-ending winning streak will likely come into
question. Shares are not likely to plunge precipitously, but 2010
may turn out to be the year of the peak. It happened to Sony, it
happened to Nokia, and soon enough, it may happen to Apple.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He started his career in equity research at Smith Barney,
culminating in a position as Senior Analyst covering European
banks. David has also served as Director of Research at Individual
Investor and has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.