Even after the stock stabilizes somewhere at or below $350 the stock is likely to be dead money for a long time, probably trading between a range of $315 and $475 for several years unless and until it introduces another major blockbuster product that can reverse the company's long-term forecasted secular decline in earnings.
There are five reasons why Apple will fall likely fall much further before it finally stabilizes:
1. Apple's earnings are in secular decline. Apple is still a secular growth story in terms of the volume of its products reaching consumers around the world. But Apple is no longer an earnings growth stock; it is an earnings contraction stock.It has become clear that Apple's unsustainably high margins have finally begun to accelerate downward in a major way. This margin compression will tend to overwhelm the growth in sales volumes going forward, causing a likely secular decline in net earnings from Apple's current line of products in the next three years.
Management currently expects gross margins to contract to 36% to 37% in the April-June quarter, down from 37.5% in the most recent quarter and below analyst expectations of 38%-39%. This level of gross margins is also down from the company's peak in the high 40%s. In my view, it is likely that Apple's gross margins will decline below 30% within three years and will stabilize at 25%-30% within five years. This implies negative earnings growth -- derived from its existing lines of products --for Apple for the next three to five years. 2. Apple needs another big hit product; it's nowhere in sight. Because Apple's earnings stream from its current product line is experiencing an essentially irreversible process of secular decline, Apple desperately needs a new hit product line to arrest its overall contraction in earnings. iWatch is not going to do it as its impact would be substitutive or "cannibalistic" on existing product lines. iTV could do it, but may not be forthcoming -- at least not for several quarters.
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