Note: See important disclaimers below article.

The price chart below looks like any investor’s dream if they got in at the right time. Things definitely have been going Apple’s way of late – in their latest quarter, Apple had record quarterly sales for Mac products (3.05 million units), iPod Touch sales grew 100% year-on-year, iTunes maintained its position as the world’s largest music retailer, iPhone sales (7.4 million units) rose 185% year-on-year and Apple now has $34 billion in cash and other liquid securities on their balance sheet. Phenomenal – to say the least, considering that we are only now coming out of a recession. But here’s the million (or billion) dollar question – can Apple really maintain or improve on these staggering growth rates? Expectations for Apple are now set at stratospheric highs, only perfection will do – nothing less.

Losing their first mover advantage?

Apple benefited from being a first mover in each of its product lines. The iPod changed the portable music industry, iTunes changed music retail, the iPhone changed smartphones and the App store changed software. Being the first mover allowed Apple to aggressively increase market share. However, first mover advantage does not last forever, once new entrants adopt the new trends, competition gets very much down to trench warfare and who can hold their ground better.

That is what we will be seeing as Apple sees more competition in each product line. To take an example, in the smartphone arena, numerous phones have emerged such as the Palm Pre, HTC Touch, LG Vu, Samsung Instinct and new Blackberries. Not to mention Google’s open source Android operating system which is being seen as the biggest threat to the iPhone. Many people are seeing similarities between what happened to the Mac when the PCs started taking up market share in the 80s and what could happen to the iPhone because of the Android platform. Nearly all the major players in the smartphone industry are part of the Open Handset Alliance that developed the Android which has now been implemented on a wide range of devices, including those from Nokia, Dell, Asus and Motorola. As a result, the choice of devices using Android will be huge. In the 80s, this choice was generated by Microsoft’s new standardized operating system which could be run on many hardware platforms and thus pushed the Macintosh out of the market. Might we see a re-run?

Likewise, while the App store is being touted as the feature that’ll keep smartphone competition away, the App store is no longer a feature unique to the iPhone. From the developer’s point of view, they will tailor their new apps to take advantage of all platforms such as the Android, PSP and the Blackberry app store, because it doesn’t make economic sense for them to restrict their apps to iPhone users.

A Comparison – Research in Motion

All that to say, it will be immensely hard for Apple to keep up its rate of growth, and margins now that it has moved past the stage where it’s still benefiting from being a first mover. To offer a comparison, look at the price chart of RIMM below from Aug 06 – Jun 08. That was when RIMM was benefiting from its own first mover advantage and expectations for its future were sky high. The second chart shows the price till present day.

Here’s a quote from a research report on RIMM from early 2008 – “Wall Street has high expectations for RIMM, they believe the company will report a solid first quarter while preparing to release a flurry of new products in the coming months to ensure its dominance in the business-oriented smart phone market.“ Sound familiar?

While I agree that Apple has a lot more loyalty towards its products than Research in Motion did, Apple too will suffer from competition and to continue to expect blow-out quarters (which analysts continue to do, hence an average price target of $234) might be asking for a little too much perfection.

Disclosure: No position in AAPL.

Image Credit: Dan Diemer under a Creative Commons license.

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