The problem with being number one is that you can easily become the victim of expectations. If you have produced excellent results in the past, people will expect you to perform at the same level. This is true of athletes. It is also true of companies. Apple (NASDAQ:APPL) is the biggest example of this. Apple just had a phenomenal fourth quarter. It’s fourth-quarter earnings destroyed all other profit reports in the history of humanity. I know this sounds overly hyped, but that’s the truth. Sure, we can just adjust that claim down by factoring in inflation. Regardless, the numbers are mind-boggling that you can’t help but respect Apple for racking up such amazing profits.
Unfortunately, these escalated expectations are so high that there’s really no direction to go for Apple but down. Does this mean that Apple stock will all of a sudden crash? Absolutely not. What it does say is that the future horizon for this company, regardless of the success of the Smartwatch, isn’t as bright as you would think. First, Apple’s stock price already has a lot of the iPhone 6’s success built in. A lot of the appreciation in Apple stock was in anticipation that iPhone 6 will beat estimates. Nobody knew that it would beat the estimates by this much. Still, a lot of Apple iPhone 6’s growth is already factored into Apple’s current stock price.
Another challenge that would-be Apple investors will face is that for Apple to perform at this rate, it has to attract huge numbers of iPhone users every single year. This is not going to happen. According to some estimates, Apple needs to attract 48M to 50M new iPhone users per year. The problem with this is that the market will get saturated. Eventually, you will hit a plateau.
Moreover, there’s also pressure on the low end of the market for Apple. This is where the biggest danger lies. The sad reality with smartphones is that consumers are beginning to look at them not as hardware nor operating systems. This is a big problem. Apple is hoping that you look at your smartphone primarily as a piece of hardware. It wins when you think that way. Why? It’s that nice Apple logo on the back which you are willing to pay a few extra hundred dollars for. Alternatively, you could look at your Android, and you could see that there’s that Android logo, and you’ll buy a phone for Android because of the operating system.
The reality on the ground is that people are looking at mobile devices primarily for the content that they lead to. In this situation, neither Google’s (NASDAQ:GOOG) Android nor Apple has much say because you are more focused on the content. If the discussion is about content, then the price of the hardware becomes immaterial. This is kryptonite to Apple’s business model. This is its biggest threat. If you need proof of this, look at the phenomenal growth rate of this previously unknown Chinese mobile company called Xiaomi. If Xiaomi ever hits American shores, watch out Apple. You might be in for a rude shock. I’m not saying that Apple at $120 a share is a bad buy. What I am saying is that if you are going to invest in this great technology company, you need to keep your eyes open.