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Now that the future of Apple (NASDAQ:AAPL) is increasingly dependent upon the success or failure of the iPhone, it has put itself at enormous risk if the smartphone starts to falter by failing to gain market share in new markets. In the current environment, as most know, that is China.
It is obvious that Apple has a couple of options going forward. It can either try to duplicate its past success of developing and releasing innovative products that create new markets, or it can focus more on its existing products and services to generate more sales per customer. Since it hasn’t had a new, meaningful product hit since 2010, it suggests the company needs to focus on getting more of its current customer base than try to develop products without a proven market.
The question is this: how can Apple make the transition to a more balanced portfolio of products and services without losing its former innovative edge? The answ er to that is in the eyes of investors and to many shareholders it has already lost that edge, and it’s time to take a different route to generate growth.
That said, there is also risk associated going with what appears to be the safer and more predictable route as well.
Apple must do something to address its iPhone exposure
You know a company is in trouble when it has a plethora of products it offers to the market, and only one of them is relevant to the bulk of its performance. That’s obviously the iPhone with Apple, and with the North American market having little more in the way of growth left in it, and the company struggling to brand itself in China, it underscores its risk in association with its heavy dependence on the iPhone to grow the company.
I understand that the market and shareholders will quickly forget all this if the next iPhone release does well, but it doesn’t take away the fact Apple can no longer rely on the iPhone to underwrite the weaker products and services doing little to add to company growth.
It seems to me the company will either have to lower expectations on new product releases and look to a portfolio of smaller, but profitable products to complement the iPhone. Either that, or as mentioned, it will have to target its exciting customer base and generate more sales per customer in order to generate sustainable growth.
Where Apple could really shine would be if it could do all of the above, including able to better penetrate and grow its brand in China. That would result in the company moving forward on all cylinders, exceeding the expectations of even its most ardent supporters.
The risk factor
It’s obvious the risk Apple now faces because of it becoming an ongoin g one-hit wonder, as measured by producing new hits on a consistent basis. It’s now clear it is either trying to change its strategy in that regard, based upon its ongoing focus on enhancing and building off of existing products and services having a proven track record.
Most businesses know it’s easier and less expensive to generate sales from existing customers, but Apple, in the past, has been so successful at rolling out a series of hit products, it has been able to somewhat ignore that rationale and practice, building the company off its growing product line. Those days appear to be over now, as it’s been almost 7 years since it has released a hit product.
The challenge for Apple is how it can convince its base customer and shareholders it has a strong future, even as it relinquishes its perception of being an innovative company that can consistently produce products that can move the needle of the company’s top and bottom lines.
This has already pr oved to be difficult, as evidenced by how hard the company is hit when iPhone sales underperform expectations, even when the company points out the growing success of its add-on products and services.
Included in that is its Services unit, which generated $6.3 billion last quarter. The problem is Apple used that to headline it earnings report. The idea shareholders would be swayed by those growth numbers and ignore the disappointing iPhone sales is silly.
Even so, it does point to the possibilities concerning focusing on other areas of the company, which when added together, could represent formidable growth potential.
Where the risk is in this area is if some of the areas it focuses on for add-on sales is disrupted by new products and services which results in customers moving onto other gadgets, potentially losing some of those sales as well.
Potentially losing its innovative leadership position
For many years Apple has been considered one of the most innovative companies on planet earth. Now that it has failed to produce another solid product hit since 2010, it has been losing a lot of its appeal in that regard, and while it retains most of its original customer base, it isn’t appealing to younger customers in important markets like China, at near the levels it has in North America.
This, more than anything, is the major risk to Apple in my view. Branding has a lot to do with perceptions and emotional connections to the company, and if it fails to be viewed as the future of tech as it has in the past by a new generation, it could easily suffer the consequence of serving its existing customer base as they age and buy less in the way of new gadgets.
With little in the way of significant new customers in North America to generate significant and sustainable growth, the failure to project its innovative advantage because of its inability to, well, innovate, it faces the challenge of having to grow by targeting its existing customer base and providing add-on products and services to current offerings, while at the same time trying to find a product that can inspire new markets to embrace its brand.< /p>
Apple has always been about the brand, and since it has lost a lot of its innovative edge over the last six to seven years, it hasn’t been able to gain the foothold it had hoped to in China with its iPhone. A lot of its competitors there offer features close enough to Apple’s to cause consumers to think the extra cost of an iPhone isn’t worth it.
A lot of this, from my point of view, comes from its lack of innovation, especially on the design side of the iPhone, which doesn’t pop when you look at it.
Competitors have been quickly catching up with Apple on a number of fronts, and that is largely from declining innovation and lack of a significant product pipeline that will generate future growth at a meaningful pace.
So while the company can employ the other strategies for growth, and it should, the additional risk is it’s considered simply another competitor among many for the new markets it’s competing in. That’s another way of saying it risks sliding into being another commodity company. In turn, that would take away the reason customers would pay more for its products.
Apple has been failing with product releases over the last six or seven years (at least in accordance with Apple standards), and that has brought about a sense of losing its edge in relationship to its compe titors. That in turn has hurt its brand in emerging markets, which are the future growth markets of the company.
I know this would all change if Apple is able to develop a winning strategy in China for its iPhone. But that’s not a guarantee, and it once again underscores its vulnerability to being a company exposed to the performance of one product.
The objections to this are obvious, but the truth is investors don’t take a position in Apple to experience incremental growth, they do so to enjoy above-market returns, and returns that exceed the returns of their competitors. If the company isn’t able to generate those types of returns, it’ll struggle to maintain its share price and market leader position.
From some of the comments coming out of Apple, it appears its attempt to reduce its exposure to the iPhone could make it a company that can continue to do grow, but not at nowhere near the pace it has in the past.
Since it has become so large, even taking the needed steps to diversify its revenue streams in order to spread the risk among all its products and services, gives the impression its best days are behind it. That doesn’t make Apple a bad company; it makes it ordinary. For Apple, that’s a disaster.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.