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Rotten Apple?

By Steven Orlowski on March 18, 2013

Apple (Nasdaq: AAPL) recently announced that it would go after the lower hanging fruit, by introducing a downscale iPhone for release during the third quarter of 2013.

Hmm, kind of smells like Mercedes Benz’s new CLA class, or the BMW 1 Series, doesn’t it?

I’m not saying it’s a bad idea. It may bring a new cluster of consumers to the brand. These are the ones that can’t, or won’t, pay for expensive phones with functions they don’t want or need—and maybe the people who aren’t concerned about social status.

When luxury automobile manufacturers follow this course of action, it can be risky. Selling a downscale jalopy with the same emblem as the luxury vehicle your company invested billions to develop can diminish the value of the entire brand.

Mercedes Benz made really bad cars for many years, notably during the Chrysler debacle. BMW has never sunk as low as Mercedes Benz did, although styling miscues certainly didn’t help sales a few years back.

But Apple isn’t a luxury brand in the same manner as automakers. Nor has Apple gone down the ruinous path to brand effacement—but the company is nonetheless at a crossroads.

Slower Momentum

Beamers and Benz’s have been around forever. Their place in the luxury auto world is almost iron clad. Mercedes Benz proved that by the way it returned to form in recent years.

But tech companies and their stocks are different. The tech sector landscape is littered with the bleached bones of once-mighty tech companies that imploded because of a series of bad decisions.

Apple is maturing. That needs to be acknowledged.

South Korea-based Samsung Electronics (OTC: SSNLF) is the world’s largest smartphone manufacturer. Whether Samsung and the new Galaxy S4 knock the iPhone off its pedestal is not really the point. There are limits to growth. And Apple is unlikely to repeat the growth it experienced throughout the peak of Steve Jobs’ second tenure at the helm.

Yes, Apple fanatics will still wait on line overnight to be the first to get the newest product. They will buy every new version of the iWhatever. But those die-hards will decline in number as the real innovation and uniqueness of the iconic Apple brand wanes.

Samsung launched the Galaxy S4 last week. The reviews are mixed. Many thought the show was gaudy, loud and expensive.

Some technophiles noted the phone’s similarities to the iPhone. Some are accusing Samsung of playing catch-up. But so what? If Samsung is catching up, the problem is Apple’s.

In fact, the entire smart phone market is catching up and Samsung just might have gotten there first. Unfortunately, many Apple-lovers will deny this reality until it’s too late.

The innovation that made Apple great twice most likely died with Steve Jobs.  Yes, there are tons of great engineers and designers and marketing and executive management people still working at Apple. But what they are managing today is the third act of a play where the main character, and the star that portrayed him, is permanently and irrevocably retired.

What to Do

For practical investors, the issue is whether to hold Apple shares—if you haven’t already sold them.

If you’ve been hanging on since last September, you lost 40 percent of the peak value of your AAPL shares. The current dividend yield is 2.5 percent. If the stock stays flat, it will take decades of dividends to get back what you’ve lost.

So unless this new, cheaper iPhone sends Apple’s stock flying high again, I suggest management listen to Warren Buffet, David Einhorn or—me.

Buffet wants an aggressive stock buyback program. He claims he once told Steve Jobs to do the same but Jobs never did. Buying back billions of dollars worth of shares could help boost the share price.

Einhorn wants a special preferred stock called iPrefs to be issued, so some of the billions AAPL has in cash can be returned to shareholders. That’s not a bad idea.

A more effective decision would be for Apple to announce an immediate dividend bump on the common shares and then commit to regular increases. This would more easily placate the existing common shareholders, attract more of them and drive the price of the stock higher.

No one doubts that Apple will continue to be a vital, profitable company. What is doubted is that it will be able to replicate the revenue growth and the stock flight path of the past.

For the intermediate term, Apple investors should hang onto their shares and see whether this innovative company exercises sufficient foresight to right itself. Perhaps the worm will turn for this still great brand.

What did you think of this article? Please post your comments below!

Steven Orlowski is a 20-year veteran of the investment business. He has worked for some of the most prestigious firms in the world in a variety of capacities, including portfolio manager, trader and high net worth financial planner.

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