5 Ways Apple Could Stumble

Bad things happen when innovative companies get big as the tech giant has grown.

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How high will it go?

Answering that question about Apple has become a kin to a parlor game for stock analysts, since the company can seemingly do no wrong. Apple's stock, now in the rarified air above $600 per share, is up 48 percent this year alone. Over the last five years, the stock has soared 571 percent, while the broader market has basically been flat.

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The company recently said it would use part of its bulging, $97 billion cash stockpile to institute a dividend and buy back some of its shares, with room to do more of that in the future. Investing firm Zacks has an Apple price target of $654 over the next six months. There's chatter among investors of Apple shares some day cresting the $1,000 mark.

Apple's formula for success is no secret. Under late CEO Steve Jobs, Apple developed innovative and intuitive products like the iPod, iPhone and iPad, transforming old industries such as music and publishing while creating new ones such as app development. In the process, Apple built a fanatically loyal customer base. More than that, Apple has developed a whole content and technology universe, which means that even when hot gizmos start to cool, millions of customers will still rely on Apple for information and entertainment.

But no company is invulnerable, and former high-flyers such as Eastman Kodak, General Motors, AOL and Sun Microsystems have proven that the mightiest firms can succumb to hubris and misdirection. Even IBM endured a near-death experience in the 1990s, requiring the corporate equivalent of emergency intervention. Apple could probably ride its current wave of success for years. Yet the seeds of decline are often planted when big companies attain unmatched market power, as Apple has done. Here's how Apple could lose its edge:

The magic could wear off. Apple has millions of happy customers because its products delight and surprise them. To keep it up, Apple can't just crank out incrementally better gizmos. It needs to keep producing game-changers that leap ahead of the competition. The big question is whether the loss of Steve Jobs will blur Apple's vision or stall innovation.. "The untimely death of Steve Jobs may hurt Apple in this regard," Zacks says in its latest analyst report on the company. "New management will be watched heavily regarding its vision and stewardship capabilities."

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Investing firm UBS notes that 62 percent of Apple's revenue comes from two relatively new products: the iPhone and iPad. For a company that's 35 years old, that's a remarkable testament to its ability to innovate. But it also creates high expectations, and if investors ever sense that Apple is losing its magic touch, the recent stock price run-up could turn out to be a temporary bubble.

Apple's competitors could wake up. Apple has a solid marketplace footing in respect to mobile phones and music players, while also jumping out to a huge lead in the tablet business. But in virtually all segments, Apple faces big competitors with deep pockets that are doubling down on new products and honing their sights on Apple. Zacks points out, for instance, that Apple has only a 15 percent market share in the mobile phone business, while Google's Android system, which debuted after the iPhone, has already nabbed 53 percent of the market. And competition will get tougher as Microsoft's Windows phone gains traction.

The market for iPods and competing music players may be close saturated, especially since most phones now play music. Big players such as Hewlett-Packard, Dell, Samsung, Sony, Amazon and HTC are taking on the iPad with their own tablets. And many analysts expect tablet sales to cut into laptop and desktop computer sales, for Apple as well as other manufacturers. "Increasing competition will hurt [Apple's] top-line going forward," says Zacks.

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One buffer against competition for Apple has been a market for digital products that is ballooning, which explains why Apple's revenue from smart phones has gone up even as its market share has gone down. Analysts still see a big untapped market for Apple products, such as those in developing countries.. But an unexpected slowdown in way people adopt new technology could make Apple more sensitive to price competition and ultimately cut into profit margins.

Apple could overplay its hand with partners. Apple relies on partnerships with a variety of firms, including music companies, publishers, app developers and wireless providers such as Verizon and AT&T. Ron Adner, a professor at Dartmouth's Tuck School of Business, who wrote about Apple in a new book called The Wide Lens, says Apple has so far enjoyed "asymmetric power partnerships" in which it's been able to dictate terms and take an oversized cut of any shared profits. The risk is that Apple could exploit its market power to squeeze partners even more, especially if there's increased pressure on Apple to sustain or improve margins. "They need to become more generous with partners, not less generous," says Adner. "The question is whether they can maintain a win-win atmosphere instead of squeezing their partners so much that partners start to look for other deals."

Apple TV could disappoint. The next big battleground for tech companies is television programming, where Apple is having a harder time developing highly profitable partnerships and gaining the kind of market share it has in other industries. When Apple first got involved in the music industry with the iPod and iTunes, it was static, with relatively little innovation. But TV viewers already have a lot of options, including Netflix, video-on-demand, websites like Hulu and free content apps offered by cable companies. "Apple doesn't have the same minimal viable footprint to jump-start a lead in TVs," says Adner. "It's a very different dynamic than what we saw in music and book publishing." Plus, Apple's ability to dictate terms has made some potential partners wary and more likely to seek alternatives.

Size could become a liability. The pace of innovation almost always slows when companies evolve into a behemoth. Some critics of Google and Microsoft, for instance, argue that these once-groundbreaking companies are now more likely to buy innovative companies than to develop breakthroughs in-house. Market leaders also attract more competition—and patent lawsuits—than niche companies. They have also become big targets for antitrust regulators, as AT&T, IBM, Microsoft and Google have learned.

Apple is now the most valuable company in the world by market capitalization. It accounts for 4.1 percent of the value of the S&P 500, according to UBS. Only five companies—AT&T, IBM, Exxon Mobil, Microsoft and General Electric—have ever represented a larger portion of the S&P 500. Apple has defied expectations many times before, so it may turn out to be the rare corporate giant that maintains the hunger and agility of a startup. As the stock keeps rising, that's what investors seem to be betting on.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.