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iSell: Why Apple's stock is due to fall
The iPod maker is certain to create more buzz at this week's MacWorld conference. But tough competitors like Google and Yahoo! are targeting Apple's turf.
By Robert Walberg
Everyone wants to take a bit out of Apple Computer these days, as company after company sets its sights on gaining share in the fast growing consumer-electronics market.
Their main target: iPods, the little music players that Apple sold 22 million of last year. With some Wall Street analysts expecting Apple to sell nearly twice as many iPods in 2006, and with Apple having sold more than 500 million songs on its iTunes site, it's no surprise that competitors are trying to muscle in.
For Apple (AAPL, news, msgs) , the challenge is to build on its momentum, maintain customer loyalty and stay out front on design and innovation. With the relentless Steve Jobs at the helm, Apple should continue to succeed on all three fronts.
But even Apple can't stay ahead forever, and with new competitors as fleet as Google (GOOG, news, msgs) and Yahoo! (YHOO, news, msgs), it might be time for Apple bulls to step aside.
A MacWorld, after all
Consumers anxious to find out what's next for Apple dont need to wait, as the MacWorld conference kicks off this week. Jobs himself will give the keynote address Tuesday. As always, look for the Apple chief to introduce a handful of new gadgets. The Street expects Jobs to introduce a new iPod Shuffle with enhanced capabilities, a new notebook computer powered by Intel chips and possibly more video relationships for the iPod. But dont be surprised if Jobs has at least one unexpected announcement sure to generate even more buzz.
Apple sat out last week's big consumer electronics show in Las Vegas -- no need to upstage its own event. But the company was still a major focus. Not in a good way, though, and not if you are an Apple enthusiast and investor.
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You see, when you have the kind of success Apple has enjoyed in the digital entertainment space, you draw competition. Take SanDisk (SNDK, news, msgs). A leading player in flash memory, SanDisk introduced a slew of small, flash-based digital music players designed to steal share from Apples iPod Nano. SanDisk hopes to capture at least a 35%-40% share of the flash-music-player market -- up from about 29% today. Apple owns about a 50% share today.
Enter the search giants
Not worried about SanDisk? Well, how about competition from the likes of Google and Microsoft (MSFT, news, msgs). Google announced that it will be selling video content from a number of partners, including CBS and the NBA. Microsoft has partnered up with MTV to start Urge, an online music store with more than two million titles available for download. (Microsoft publishes MSN Money.)
Several other companies have targeted iTunes, most notably RealNetworks (RNWK, news, msgs) and Yahoo! (YHOO, news, msgs). In fact, Hewlett-Packard (HPQ, news, msgs) just dumped Apples iTunes and added RealNetworks' Rhapsody as the preferred music site on its computers.
While Apple is still in position to leverage its early success and drive strong top- and bottom-line growth for the foreseeable future, the pace of growth is likely to slow. Some of the growth lost in the digital entertainment space might be made up by increased growth from the companys personal-computer business, but probably not enough to meet current expectations on Wall Street.
Thats where the problem comes in for investors. Based on the companys tremendous success with the iPod, expectations for Apple are sky high. The stock currently trades at more than 40 times estimated fiscal-year 2006 earning of $1.88 a share and 4.5 times trailing 12-month sales -- high multiples indeed.
Apples valuation isnt as obscene as, say, Googles, but the growth rate is slower and the potential for disappointment -- in light of the growing competition -- is greater. Consequently, investors long the stock might want to consider using the MacWorld hype to reduce exposure to the stock.
Though its possible Apple will continue to steamroll the competition, the chances for a miscue are increasing with each quarter, as is the downside risk in the stock. Exposing yourself to that risk seems unnecessary, especially when you can bank some solid profits in a stock at or near its all-time high.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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