Apple's Greatest Challenge In the Next 10 Years (AAPL)

Apple Inc. (AAPL) has always been a keen innovator of consumer electronics. But it has slowly become a victim of its own success. Over the past decades Apple has been able to do something which almost no other company has done. It has generated huge profit margins and grew its market share to become literally the largest company in the world by market capitalization. And amazingly the company is still growing. As one of the most profitable businesses on the stock market the pressure from investors for AAPL to continue to outperform is unbelievably high.

Apple’s methodology of bringing new products and services to its customers has been to move slowly, deliberately, and carefully so it can deliver something new that is better than anything else that already exists. This has been Apple’s strategic advantage since the beginning. Today everyone’s eyes are on the giant tech company so it can’t release a product and not have it be widely successful. If Apple comes out with a new product that is anything short of perfect, or does not execute a perfect launch with enormous success then critics and analysts will denounce the company because it will no longer be the perfect Apple that never disappoints. The expectations are unreasonably high for Apple to deliver quarter after quarter, device after device. However the technology industry is growing and changing very quickly. Apple’s traditional strategy of moving slow and careful to produce a very polished looking device may not work for them anymore in the future because newer and smaller consumer electronic companies which are more agile, can release comparable products before Apple in order to get an early movers advantage in the market.

One example of this trend is the virtual reality (VR) space. The video game industry has been developing VR technology for many years. But since games have not been Apple’s traditional area of focus and it hasn’t attracted a large gaming community or developers, Apple will have to play catch-up in this fairly new market. Even Facebook, a social media site, is ahead of Apple in terms of VR technology as it purchased Occulus Rift, one of the leading hardware manufacturers and developers of virtual reality.

Apple needs to find a way continue to bring value to shareholders by introducing only successful product lines of new technology, but not take too long to release them. Apple’s greatest challenge in the foreseeable future is to find new ways to compete in new consumer markets without compromising its current standards of high quality design and craftsmanship. Needless to say, Apple’s best growth days are probably behind it. But it is still a very profitable company, and its stock is actually quite fairly valued. The price to earnings ratio of AAPL is only about 11.4 times. This likely means that the market has already priced in a possible under performance of the company’s financial in the upcoming earnings reports.

The company doesn’t disclose sales numbers for its Apple Watch. Instead, its line of watch devices is recorded in its “other products” category, which also includes the Apple TV, iPods, and third-party accessories with the Apple brand. In its latest earnings conference call Apple revealed that the top line revenue from its “other products” category increased by 62% during the quarter, in large part thanks to record sales of both Apple Watch and Apple TV. However this category of products only represents a small 6% of the company’s total sales. Even if its Apple Watch continues to see strong sales growth over the next few quarters it will not affect the company’s financial figures in a very meaningful way. The iPhone on the other hand is a much bigger deal for the company. Almost 70% of Apple’s revenue comes from iPhone sales. It will be interesting to see how Apple will innovate and disrupt new product categories in the years to come.

This Author is long 21 shares in AAPL.