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Is Apple's Reign Over? A sell?

Posted by Peter McKinnon (peterlmckinnon) on Mar 07 2012
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Apple Is a Sell
By Chris Mayer

Apple is a sell.

I know, I know. Nobody wants to read about a stock that is a sell. You want to know about the next big winner, the next Apple.

But hear me out. There is a unique twist to this story that you probably don’t know. This cinched it for me — it is what inspired me to take to the keyboard.

Now, I know it may seem crazy to say anything contrary to the bull thesis on Apple. After all, the company has probably around $100 billion in cash right now. That’s about 20% of its market cap. It grew more than 70% in its last quarter, trades for only 15 trailing earnings and only 11 times this year’s consensus guess.

Hard as it is to believe, Apple looks like a value stock.

Yet the stock has been on fire. As I write, the stock has just put in a new all-time high of $547 per share. It is up 33% in 2012 alone. It’s up 159% since the start of 2010. The market cap of Apple is over $500 billion. It is only the sixth company ever to reach that mark after Microsoft, GE, Cisco, Intel and Exxon Mobil. None of the others held that spot for long. (GE held it for about a year, but it stepped down quite a bit after that. Cisco held it for two weeks; Intel for a day.)

That huge price tag has led to the creation of a whimsical website dedicated to telling you things that Apple is worth more than. For example, Apple is worth more than it cost to build the U.S. highway system. It’s worth more than the U.S. aircraft carrier fleet, more than retail electricity sales in the U.S., more than the global coffee industry, more than the U.S. beef industry. It’s worth more than the National Football League — times ten!

To get there, the stock has no shortage of boosters. I happened to catch a segment on CNBC recently in which a fluffy-minded blond host had two guests on her show to talk about Apple’s stock. She opened by saying she wanted to have one bull and one bear, but she couldn’t find a bear. So the segment basically turned into a cheerleading session for Apple, with both guests telling us why Apple’s stock was going to move higher.


It’s hard to find anyone willing to take the other side because nearly everyone owns it. The Wall Street Journal reports today that of the 465 funds Morningstar tracks, 400 own shares of Apple. And 320 of them have made it at least 4% of the fund’s holdings. “It’s the stock everyone seems to have to own,” says Richard Nackenson of Neuberger Berman, quoted in the story.

This alone is a telling piece of anecdotal evidence, by the way. When everyone thinks alike, there isn’t much thinking going on, as the old saying has it. The investing annals are full of sure things that evaporated like the morning dew.

But Apple does have a few big problems with which to contend...

The first is obvious, and that is the loss of its visionary founder, Steve Jobs. It is hard to think of Apple without also thinking of Steve Jobs. There is, of course, a very good reason for that. He was instrumental in bringing about the array of beloved products that Apple is famous for producing. I can’t understand how anyone can look past the loss of Jobs and think that the company’s future could be brighter without him than it has been with him.

The loss of Jobs was a dramatic blow to the company, and it will have all kinds of effects that are hard to quantify, or even imagine. I think its ability to reinvent and create is much diminished. Its future looks more like Microsoft’s to me, a tech giant milking past successes but an also-ran in the derby for creative breakthroughs.

But the real reason I take to the keyboard has to do with the sustainability of its most-popular product, the iPhone, which makes up half of its sales.

Here I give credit to Anton Troianovski, who wrote a piece titled “iPhone’s Crutch of Subsidies” in The Wall Street Journal. In the U.S., hardware manufacturers pay Apple about $400 every time a customer buys an iPhone with a two-year contract. By contrast, Google licenses its Android to hardware manufacturers for free.

Let that sink in. Does that sound like a sustainable business model? It sounds to me like the soft underbelly of a mighty beast called Apple.

We’re already seeing this play out in Europe, where a weaker economy perhaps forces people to be more budget conscious. In Europe, Troianovski writes, Android phones cost less than $200 without a contract. The cheapest can be had for about $106. Contrast this with Apple, whose cheapest phone, a four-year-old model of the iPhone 3GS, goes for $535.

No wonder the Android is eating into Apple’s lead. In hard-pressed markets like Portugal and Greece, more than 90% of all smartphones sales were Android sales last year.

Suddenly, the hardware manufacturers are starting to wonder about that stiff subsidy. The CEO of the telecom giant Telefonica Spain said: “We can’t keep subsidies at these levels.” In Denmark, wireless carriers have already stopped paying the subsidy.

Apple is going to lose in Europe. Either it sticks to its strategy and Android eats its lunch, or it lowers the subsidy, which will impact its bottom line.

The bigger prizes out there are the emerging markets. Apple’s CEO said the emerging markets are “critical” to Apple. Yet how do you think this subsidy model will roll out in places like China, India and Brazil?

My hunch is that is won’t be nearly as successful as Google’s “give it away for free” model.

In the U.S., this subsidy issue hasn’t been a problem because people pay a lot for a phone to begin with. But how long will that last? It’s hard to say. But I think the fundamental problem is that Apple’s products are luxuries, and that makes them vulnerable on the price front.

Then there is the issue of the Apple iPad, which is the second-most- popular product, at nearly 20% of sales. There is a lot of anticipation about the iPad 3. Why? Well, it’s supposed to have maybe a higher screen resolution or better touch-screen.

I don’t know, maybe there will be more features. But I have an iPad. I don’t think any of the rumored upgrades are going to induce me to buy another one. It seems to me the biggest innovation with the iPad was the device itself. There was nothing like it before. Now there is. Incremental innovations get much tougher from here, much like with a PC or a laptop, or even a smartphone.

What it all comes down to is this: For Apple, things will never get better than they are today. You can’t improve on perfection. Its products are luxuries, clearly vulnerable to cost pressures. It’s surrounded by hungry and eager competitors. And its most-popular product has a definite soft underbelly that the arrows of competitors will find soon enough.

For all these reasons, if I owned Apple — which I don’t — I’d sell it.


Chris Mayer

Apple Is a Sell is featured at Penny Sleuth.

Last changed: Mar 06 2012 at 6:54 PM

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