Apple Inc. (NASDAQ:AAPL) posted weak Q4 results as its management appears to be living in a bubble, notes Indigo Equity Research.

N. Landell-Mills of Indigo Equity Research Ltd feels Apple Inc. (NASDAQ:AAPL)’s recent product upgrades are not adequate to arrest the downward trend witnessed in revenues and margins.

Apple management’s flawed strategy

Indigo Equity Research’s analyst reviewing the fourth quarter of 2013 observes Apple Inc. (NASDAQ:AAPL)’s revenue growth slowed to 4%, while its EPS fell 7% to $8.06. Though the iPhone continues to grow, its pace of growth is quite slow at just 14%.

Apple Inc. (NASDAQ:AAPL)’s other key products also declined with MAC falling 15% while iPad fell 18%. Notably, Apple is losing its market share as unit growth is well below that for the respective industries.

The following graph highlights Apple Inc. (NASDAQ:AAPL)’s year-on-year change in revenue by product:

Apple yoy change in product revenue

As is evident from the above graph, Apple Inc. (NASDAQ:AAPL)’s iTunes Store Revenue rose admirably at 86% to $4.3 billion, while iPod revenue fell by over 30% to $0.6 billion.

N. Landell-Mills of Indigo Equity Research Ltd states that Apple Inc. (NASDAQ:AAPL)’s management appear to be living in a bubble, focusing on producing what they consider to be the best products instead of listening more to their stakeholders such as customers, markets and shareholders.

Apple’s dwindling smartphone market share

Apple Inc. (NASDAQ:AAPL) is fast losing its smartphone market share to Samsung. Its recent earnings report revealed the company shipped 33.8 million iPhones in the quarter, while Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) managed to ship over twice that amount, recording a total of 88.4 million smartphone shipments in the quarter.

Smartphone Market Share

Indigo Equity’s analyst points out the smartphone industry is shifting from premium to mass market, where prices and margins are lower and more importantly, where Apple Inc. (NASDAQ:AAPL) lacks presence. Besides, Apple Inc. (NASDAQ:AAPL)’s high margins are also facing risk from increasing competition, expanding product range and frequent upgrade cycles, all pointing to price erosion.

Apple’s SWOT Analysis

N. Landell-Mills believes Apple Inc. (NASDAQ:AAPL) derives its strength from its excellent product family such as iPad and iPhones, as well as deriving benefits from the ‘halo effect’ and complimentary products. Apple Inc. (NASDAQ:AAPL)’s opportunities emerge from product upgrades and new product launches such as Apple TV and iWatch. However, the analyst notes that Apple is facing challenges, too, as the iPhone no longer is the cutting-edge smartphone, besides being hampered by slow product development. Furthermore, Apple faces the threat of Google Inc (NASDAQ:GOOG)’s Android OS and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and its increasingly rapid product cycles.

Indigo Equity’s analyst thinks Apple Inc. (NASDAQ:AAPL)’s EPS growth has been stalled due to EBIT margin contraction and slower revenue growth. The analyst also believes this trend will continue as the tablet and smartphone market is commoditized.  The following graph highlights Apple Inc. (NASDAQ:AAPL)’s past and projected return:

Apple's estimated 12m return

Indigo Equity Research’s analyst pegged Apple Inc. (NASDAQ:AAPL)’s price in bull case scenario at $521, while the share price has been pegged at $378 and $445 in the case of bear and base scenarios respectively.