The Biggest Risk to Apple Inc. Stock

By Markets Fool.com

Continue Reading Below

Nearly one year after its seven-for-one stock split, Apple continues its phenomenal run. During the last year, the company is up nearly 37% while the broader S&P 500 index is up only 8% during that period. And as Apple continues to tip the scales as the largest publicly traded company ever, we asked a few of our technology specialists what could stop Cupertino's amazing growth.

Dan Caplinger: Apple stock might well seem invulnerable, given the company's huge rise to boasting the biggest market capitalization of any stock in the market. Yet the same forces that have helped drive Apple shares higher could end up being part of its share-price downfall.

Index investors in the S&P 500 automatically buy Apple shares every time they invest, with the tech giant making up the biggest portion of the popular benchmark. Now, Apple's market cap is about double the next highest in the S&P 500, and that has raised concerns that the company has too much influence over the market.

In the past, the Nasdaq 100 index faced this same problem, and it took the remarkable step of slashing Apple's weighting compared to other large tech stocks. At the time, Apple made up more than 20% of the Nasdaq 100, but after those rebalancing changes were made, its influence fell to just more than 12%.

With the S&P 500 calculating weightings using float-adjusted market capitalization, changes in Apple's share price should automatically get reflected in its influence on the index. Nevertheless, if the company that manages the S&P 500 decides that a new methodology for assigning weightings is appropriate, it could lead to the selling of Apple shares by index funds that could, in turn, have a downward influence on its stock price.

Continue Reading Below

Tim Brugger:No doubt about it, Apple is on a great run coming off record Q2 results and eye-popping smartphone sales. Of course, all publicly traded companies have risks to consider, and that includes Apple.

Last quarter demonstrates what I consider to be the biggest risk to Apple long term: an over reliance on iPhone revenues. Last quarter was a microcosm of Apple's lack of revenue diversification: A whopping 70% of Apple's $58 billion in Q2 revenues were derived from iPhone sales. iFans may point out that the fairly recent introduction of the iPhones skewed the figure, and there's something to be said for that.

However, last year's Q2 results were much the same, though not quite as dramatic. In 2014's Q2, iPhone revenues accounted for 57% of total sales, a figure that still speaks to Apple's over reliance on one product. Smartphones are a highly competitive market, one in which Apple dominates. But what happens if competitors -- over time -- are able to eat into Apple's iPhone market share? Or, as my associate Jamal addresses in more detail below, what happens if telecoms decide to stop footing the iPhone bill?

It's not just Apple; any company that relies too heavily on one product is at risk. Historically, Apple has been known for its innovation, something it could use a great deal more of to limit the risk associated with its lack of revenue diversification.

: Although the broad concern is the same, I'm going to be slightly more nuanced than my colleague Tim. During the last two quarters, the company has registered 50%-plus revenue growth in the iPhone product line with many expecting an additional 50 million units to be sold in the current quarter. In the end, I think that could be a problem for the stock in the near term as the company will suffer from tough year-over-year comparisons with both unit sales and average selling prices. This extreme reliance on iPhone revenues has the potential to put a crimp in Apple's top and bottom lines.

These concerns are perhaps larger in the United States, where there's a definite trend toward carriers pushing subscribers away from the device subsidy of yesteryear. And while each situation is different, as there are definite benefits to paying full price for your phone including pay-as-you-go relationships without termination fees, it seems this is also a negative for iPhone sales. For example, last year, research firm Kantar, by way of The Wall Street Journal,noted that Apple had market-share figures of 40% plus in the United States and Japan, countries with a device subsidy, while its global market share was 12%.

These carriers are allowing installment plans to pay for the phone, but decoupling the phone price leads to price awareness, and could lead to a trade down, or at least a slower upgrade cycle. In the end, either of those things are bad for iPhone sales.

Apple's growing like gangbusters in China, a country that's never been spoiled by the device subsidy, and will probably handle any carrier changes in the U.S., as well. In the end, I think it's something to keep an eye on, but I continue to own Apple, and haven't lost a night's sleep yet.

The article The Biggest Risk to Apple Inc. Stock originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. Jamal Carnette owns shares of Apple. Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.