Mighty Apple is on the ropes.
Since September, when Apple stock closed at an all-time high of $702, the shares have endured the biggest drop in value in the company's history. Apple shares have now fallen below the psychologically significant threshold of $500, to about $486. The stock is still up 16 percent over the last 12 months, but the amazing run-up driven by the iPod, iPhone and iPad finally appears to be losing altitude.
Apple remains highly profitable, and many Wall Street analysts think the stock is still a buy—especially at a price that's 30 percent lower than the 2012 high. But the reasons for the stock's decline suggest that consumers, not investors, may end up as the biggest beneficiaries of Apple's changing fortunes.
Investors are worried about Apple mainly because its iconic products no longer seem as dominant as they once were. The iPod, despite many clever updates, has been around for more than a decade and is geriatric by technology standards. The iPhone, Apple's cash cow, has been losing market share to Android phones made by Samsung and others, forcing Apple to reduce orders recently in anticipation of softer iPhone 5 sales in 2013. And the iPad, in many ways the original tablet device, now faces competition from Google, Microsoft and a crowded field of other big tech names.
All that competition means Apple's profit margins are likely to shrink—one of the biggest worries analysts cite in their forecasts for the company. But falling margins usually results from falling retail prices, or from higher costs associated with adding more features to products so they stand out from the competition. So Apple's loss is likely to be consumers' gain.
That pattern is typical in the market for most products, especially electronics. What's remarkable about Apple is that it has retained extraordinary pricing power for as long as it has. The iPhone 5, for instance, starts at $199 and still fetches a sizable premium over most other phones, which hasn't been eroded during the six years the iPhone has been on the market. And discounts for Apple products, of course, are notoriously rare.
Apple seems to have anticipated the point at which competitive pressure might force it to go down-market and lower prices. But instead of just slashing prices, like many companies would, Apple has also rolled out cheaper, slightly less capable versions of hit gizmos such as the iPod and most recently the iPad, to hit a lower price point while maintaining high margins. By the same token, a sort of iPhone lite is rumored to be on the way, for perhaps 25 to 50 percent less than the mainline model.
Still, to turn around the slide in its stock price and push margins back up, Apple probably needs another breakthrough innovation rather than the incremental improvements to existing products that have been the norm since the iPad debuted in 2010. An Apple TV might do the trick, if Apple could pull off the same magic it did with earlier products. But that could be difficult, given that lining up cable companies and other programmers willing to adopt Apple's technical standards—as Apple did with music companies for the iTunes store—doesn't seem to in the cards. Apple fans seem right to wonder if the company's best days ended when CEO Steve Jobs died in 2011.
With a huge cash hoard of roughly $120 billion, Apple could buy other companies to also enhance profitability. But that has never been Apple's style, since it prefers to develop products in-house, along with the whole ecosystem of software and peripherals. That may force Apple and its shareholders to simply accept the lower margins that come with competitive pressure to offer consumers a better and better deal. If it happens, Apple may no longer be a Wall Street darling, but it could be more popular than ever with shoppers.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.