Friday, July 22, 2011 8:07:25 PM
http://online.wsj.com/article/SB10001424053111904233404576460331010146562.html?mod=googlenews_wsj
Why Apple's Success Isn't Spreading to Others
Apple Inc. is crushing it, but its success is disrupting the technology sector in ways that could hurt the stocks of many other players—friend and foe alike.
Last week, Apple's quarterly results stunned even the optimistic watchers on Wall Street. Eschewing the usual kabuki dance where a company magically beats the analysts' consensus estimate by a penny or three, Apple reported second-quarter earnings of $7.79 a share, oceans past the $5.85 estimate.
Shares of Apple surged after the report, briefly clawing above $400 before falling back. Apple now trades around $390. After the earnings announcement, several gobsmacked analysts rapidly upped their 12-month price targets above $500 a share.
Often a hot company helps drive its sector. For instance, Apple's 1980s success with the Macintosh sparked a personal-computing revolution that spawned many successful companies.
But Apple has become so dominant that is becoming more a threat—rather than a sentiment booster—to the rest of the technology sector. That isn't to say investors should ignore other tech players—they just aren't as likely to see the same kind of upside that Apple enjoys.
To be sure, plenty of companies, such as Qualcomm and Arm Holdings, ride the Apple coattails. But that can be a dangerous game. Apple has become a sort of Wal-Mart of techland, able to drive tough bargains with suppliers as it builds dominant positions in key device markets. One of its advantages is delivering sexy products at price points that don't break the bank. And gadgets tend to get cheaper over time, which means Apple will have to squeeze suppliers more if it wants to retain its profits.
Apple, now second only to Exxon Mobil in terms of market value, wields its power with companies big and small. Adobe Systems, a software giant and maker of Flash, has found it challenging and expensive to penetrate Apple's world.
Apple, of course, does face challenges. Analysts fret that mobile carriers won't keep pace with the demand Apple's devices are creating. Component shortages could slow manufacturing. And Apple has gotten so huge that maintaining its torrid growth rate won't be easy. The stock isn't terribly expensive, trading at about 15 times trailing earnings, which is less than the S&P 500's 16 times trailing earnings. But one profit blip could change that in a hurry.
Research In Motion, which essentially invented the smartphone market, has taken a beating. Trading at near $70 in February, the BlackBerry maker is now in the mid-$20s. Nokia's shares have been halved since February, and the former handset king has reached out to Microsoft in a bid to leapfrog into a stronger smartphone position. Apple faces stiff competition in the phone market, primarily from Google Android phones made inexpensively out of Asia by companies like Samsung Electronics and HTC. But Apple is countering with cheaper versions of its iPhone.
Tablet makers aren't faring much better. CLSA, a research shop, estimates that Apple sold about 9.25 iPads for every Google Android tablet in the most recent quarter. This, despite a proliferation of new tablets coming from Research In Motion, Hewlett-Packard, Samsung and Motorola Mobility. As Apple has romped to record highs, Motorola Mobility shares have slid to $23 from $34 in January and Hewlett-Packard shares have dropped to $35 from $49.
Perhaps the most disruptive aspect of Apple's strategy is the way it is reshaping the personal computer space. Apple's various Mac products are selling decently, but the emergence of the iPad has changed the PC calculus.
Intel, which reported strong earnings on Wednesday, remains upbeat about PCs (which use its chips). It pointed to 70% sales gains in Turkey and Indonesia during the quarter. At the same time, it trimmed back its overall forecast for PC sales. Mobile devices, chiefly the iPad, are rapidly eating into the segment.
And that will likely continue, perhaps faster than expected. The company said after its earnings release that 86% of Fortune 500 companies are "testing or deploying" the iPad. PC backers had counted on the notoriously conservative corporate IT gate keepers to move slowly on the iPad. Of course, "testing" could mean a few iPads in the executive suite, but Apple is clearly signaling that it is making headway with the biggest companies, the stronghold of PCs.
Not surprisingly, PC-centric stocks have not done as well as Apple. Intel's shares eased after its strong earnings, but they have risen nearly 10% this year, and are down modestly from May highs. Microsoft's shares are down 2% this year, but they have bounced 15% since June 10.
Both companies continue to be massive cash generators. But unlike Apple, they have had to deploy more of their cash in the form of dividends and buybacks to attract investors. Intel pays a solid 3.7% yield and bought back more than $1 billion in shares in the most recent quarter. Microsoft pays a dividend of 2.4%.
As Apple races to become the biggest stock in the land, it is swiftly becoming a sector unto itself. The non-Apple tech world is on its own.
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