Stock prices rise and fall all the time — normal undulations in an unpredictable economy. But when Apple's stock price falls, it's as if the universe is suddenly out of whack.
Apple's usually untethered stock has dropped by 12 percent since mid-September, when it peaked at a stratospheric $705 per share. In technical terms, that amounts to a "correction." More alarming: Apple's shares have fallen by much more than the overall market lately, suggesting there's something wrong with Apple itself, not with the broader economy.
It's almost too much to comprehend. "What Is Wrong With Apple's Stock?" Forbes asked plaintively. Tech analyst Henry Blodgett blamed disappointing iPhone 5 sales and supply problems that have left some Apple junkies unable to sate their need for immediate gratification. Other news reports have fingered an unpublicized (and unconfirmed) strike by 4,000 workers who assemble Apple devices in China. And of course some Applenauts feel that co-founder Steve Jobs, who died just over a year ago, would never have allowed a flub like the balky new Apple Maps app for the iPhone 5, which drew sneers from critics.
Those explanations are all plausible, but it could also be the case that a five-year run of astonishing profitability at Apple is simply flattening out, as the world's most valuable company slowly loses dominance in markets it largely had to itself for a while. Apple did well in the early 2000s, as the iPod and iTunes changed the way people bought and listened to music. But the real revolution at Apple began with the iPhone, introduced in 2007, and the iPad, which arrived in 2010. Both products rapidly gained market share, while a whole ecosystem of apps and accessories grew around Apple, further boosting its products.
Competitors are now catching up. The iPhone, which accounts for more than 40 percent of Apple's revenue, has been Apple's cash cow, yet market leader Samsung has three times the market share of the iPhone, and has been gaining share faster than Apple. The iPhone should continue to be a strong performer for Apple, but analysts expect the explosive growth in sales over the last few years to slow as the market matures.
The iPad has been even more dominant, with market share as high as 70 percent. But that seems certain to slip as a slew of new tablet devices hit the market, from top makers including Microsoft, Google, Amazon, and others. The tablet market is still growing rapidly, so iPad sales will probably keep rising even if Apple's share declines. And the iPad "Mini" that's supposedly coming later this fall will help Apple compete against lower-priced tablets. Still, Apple now must share a market that it practically created.
Meanwhile, the PC market has stagnated, which means Apple's Macintosh computers will have to significantly outperform the industry average to keep profit margins high. And iPod sales are likely to decline in the future, unless Apple comes up with new twists that reinvigorate this saturated market.
Apple's magic, of course, has been a remarkable combination of brand cachet, customer loyalty, and technical innovation that pushed profit margins from 10 percent in 2006 to 27 percent today. That's extraordinarily high. Samsung's profit margin is only about 9 percent. Dell's is just 5 percent. Other Apple competitors, such as HP and Sony, struggle just to turn a profit.
The only technology companies that have been able to sustain profit margins on the scale of Apple have typically been quasi monopolies that end up fighting with government antitrust regulators. Microsoft's profit margin, for instance, peaked at 41 percent in 2000, according to S&P Capital IQ; it has since fallen to about 23 percent. Google's profit margin peaked at 29 percent in 2010, and is now at about 26 percent.Apple remains a powerhouse, with iPhone 5 sales robust enough to boost overall retail sales for the entire country in the latest monthly reading. But it's not a monopoly, and 2012 could represent Apple's peak profitability. Capital IQ estimates that Apple sales for the 2012 fiscal year, which ended in September, grew by about 45 percent. (Apple will report its full-year 2012 earnings on October 25.) That would be exceptional growth—but lower than the 66 percent growth in 2011 and the 52 percent growth in 2010. Analysts surveyed by Capital IQ expect Apple's revenue growth to level off to 24 percent in 2013 and a mere 15 percent in 2014.
That would still leave Apple as a highly prosperous company, with a huge pile of cash it can use for acquisitions, expansion, or dividend payments. But Apple may simply start to perform more like a normal company, with the sliding stock price now indicating that the great Apple boom has run its course.
The one wild card is whether Apple has further tricks up its sleeve that will transform yet another market, or create a brand new one. Over the last decade, that became Steve Jobs's specialty, with a legacy of spectacular profits that outlasted the singular innovator. The question now is whether that transformative magic died with Jobs, or stayed with Apple. Watch the stock price to find out.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.