The big reason that Apple’s (AAPL) stock price has been tanking isn’t because anyone thinks the company will collapse over the next year; rather, it’s because investors are worried that the company will simply be unable to maintain the sky-high margins on its products in the face of brutal competition from low-cost Android devices. Walter Piecyk of BTIG Research writes that he’s maintaining a neutral rating on Apple shares because competitive pressures may force Apple into “compressing product cycles” that “could lead to Apple’s reporting its first decline in quarterly EPS in nearly a decade.”
The reason that compressed product cycles could hurt Apple’s profitability, Piecyk writes, is that it is “effectively stacking the highest level of sales in the quarter when Apple is producing its worst margins in the life cycle of a product.” Or put another way, when Apple puts out products more frequently, it produces them at times when its manufacturing yields are relatively poor and it risks cannibalizing sales of legacy Apple products more than if the company stuck to releasing fewer new products.
As we’ve seen before, though, Apple share prices have fallen pretty rapidly in the past before roaring back to life soon after, so it’s not clear whether the company’s current market woes are a real paradigm shift or just the usual cycle of irrational exuberance followed by irrational depression.
