apple earnings

Apple Inc. (NASDAQ:AAPL)’s stock shot up last month after an earnings beat that included both higher than expected iPhone sales and improving gross margins, not to mention a big boost to this year’s capital return plans. But some analysts are starting to have second thoughts about Apple’s long-term prospects as they don’t see much room for Apple Inc. (NASDAQ:AAPL) improve sales numbers.

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Apple has falling net profit margins in a mature market

Apple Inc. (NASDAQ:AAPL) has one of the strongest brands in the world, and has a great lineup of products, but Indigo Equity Research analyst Nicholas Landell-Mills, who describes the recent earnings report as mixed, no longer sees the iPhone as cutting edge. He also argues in a May 7 report that declining iPad sales, the impact of fewer contract subsidies from American mobile providers, and rapid product cycles are serious threats that Apple needs to face if it is going to keep its share price high.

iMacs has its supporters, and iTunes has made Apple Inc. (NASDAQ:AAPL) plenty of money, but the growth in the devices division is why it has more money than it knows what to do with. That’s why its worrisome that iPad sales are falling and iPhone sales driven by the launch of a new model. The iPhone 5 has recovered most of the ground lost in the second half of 2012, but Apple’s smart phone market share is still below its 2011 high, and it’s in decline measured peak-to-peak (or trough-to-trough).

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While gross margins have improved, EBIT margins and net income margins declined slightly and Landell-Mills forecasts that they will continue to fall over the next year and a half. With slowing growth and falling net income margins, Apple Inc. (NASDAQ:AAPL) is starting to look like a mature company, but its PE is on the rise.

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New products such as wearable tech could drive earnings

But this assumes that Apple Inc. (NASDAQ:AAPL) continues to rely on its current lineup of devices (and new models to provide periodic sales boosts), and rumors of wearable tech called the iWatch gives the stock a big upside. Even though interest in the iPad has slowed the tablet made a big splash when it was first introduced, while the iPod and iPhone breathed new life into their respective niches. Wearable tech is already on the market, but it could be the Apple knack for making mobile devices that people love to use that pushes smart watches into the mainstream

Landell-Mills also lists a low-end iPhone as an opportunity for Apple Inc. (NASDAQ:AAPL) to kick revenue growth back into high gear, but if there’s one thing that years of watching Apple should tell you it’s that the company has no interest fighting for the bottom of the market.