Apple (AAPL)

Apple appears to have a clearer grasp of the shape of the technology product marketplace than any other company serving the consumer, and is far more adept in crafting product design that evokes enthusiastic marketplace response

All products go through normal cycles where sales plateau or decline and that will undoubtedly be true of Apple as well. The company has a clear understanding of this and does not hesitate to refresh products or indeed supercede existing design with new products, rather than waiting for the competition to do it for them

Where other computer companies have failed in expanding into their own retail presence (Gateway, Dell), Apple has famously succeeded

Where its stock price goes will be subject to the vagarities of the market. Technology will continue to advance. And with Steve Jobs leading the company, Apple will be at the leading edge

This is not to say that Apple (NASDAQ:AAPL) won’t continue to grow. But does that mean that this will translate into an increasing stock price?

When you’re looking to buy a stock, the most important factor is of course the price! One would buy a green apple from your local supermarket for $200 each just because everyone else is, right?

One has to consider a whole slew of factors before making a stock purchase. For the beginning investor, some basic things to look for are:

• Book Value
• Earnings / Share (EPS)
• Price / Earnings (P/E)
• Beta

With a book value of $20 / share and a beta of over 2.5, AAPL is simply too risky of a stock to purchase. Its price is really inflated because investors are betting that AAPL will continue to grow and people will continue to buy their stock.

And they probably will continue to grow, and people will probably continue to buy their stock.

But one shouldn’t be making your investment decisions based on how the market is going to react. One should be investing based on how a company is going to perform, and how badly the market has priced the stock of this particular company.

The old adage if it aint broke don't fix it seems to apply to Apple's iPod.

"They're all working, so there's no need to buy more," says Chris.

"After years of strong growth, sales for the iPod appear to be plateauing and may soon decline for the first quarter since it was introduced seven years ago. Everyone who wants an iPod now has one, it seems."

http://www.ecommercetimes.com/rsstory/65363.html

Back in October of 2001, Apple introduced the first iPod. Apple’s press release read - an “Ultra-Portable MP3 Music Player Puts 1,000 Songs in Your Pocket”. Priced at $399 a pop and aided by really slick advertising, it was an instant hit - that put Apple on the fast track - from a company whose stock was in the cellar for almost two decades - to a growth stock with excellent long-term potential.

AAPL - who famously rejected Intel’s chips and went with Motorola back during the birth of the PC in the early 1980’s, finally picked Intel as their choice of CPU in mid-2005. But Apple had already re-written their operating system, and its guts were UNIX [BSD 5.x] - making the switch from PowerPC to Intel rather painless [for Apple]. At this point, Apple had a mere 5% share of the PC market - with a focus on education, artists, and graphic/industrial design.

By mid 2006, all of Apple’s computer offerings had Intel CPU’s and Intel chip-sets. Files were interchangeable easily between Apple’s and other systems, and Microsoft’s Office ran [runs] on the Mac. With the narrowing gap between the PC and the Mac, and with the cachet of “coolness” that the Mac had, Apple’s market share rose to the high single digits by 2007. Former PC owners [like me] switched to the Mac - because the OS was more generic [UNIX], and file transfer issues of the past do not apply to the current generation of Mac hardware and software. ^[1]

What Apple did correctly [till now]:

1. Slick new devices like iPod.

2. iTunes

3. Mac O/S went from proprietary to UNIX based [easy file sharing with other OS's].

4. Slick new Macintosh designs - based on Intel CPUs and Intel chipsets.

5. iPhone/iPod Touch.

But, Apple is getting complacent. The latest revision of iPod Nano was evolutionary, heck, it was cosmetic. The feature most requested by Nano users - was built-in FM with recording, but Apple chose to not include FM with the Nano - instead, one has to buy this option separately, and there is no way one can record a tune playing on the radio - as there is no “record button” on any iPod.

While the next generation of Macs will have an Intel CPU, they will have an Apple-proprietary chip-set - making things more problematic for boot-camp hackers - the only bunch of happy Vista users. Apple shifted resources from OSX-Snow Leopard to iPhoneG3. This has already ticked off a bunch of Apple faithfuls - who look forward to every revision of the OS and the Mac - like Porschephiles do, the 911. Apple’s survival through the 1980’s and 1990’s was under-written by these faithful - who bought Macs despite the fact that they had to jump through hoops to transfer a file to someone who owned a PC.

Apple chose to not market the iPod Touch as aggressively as they do, their other products - so as to not cannibalize into iPhone sales. The Touch is probably the best compact mobile internet device [MID], yet it isn’t marketed as such. Yet, in the last two quarters, iPod Touch growth has outpaced the growth of other iPods - keeping AAPL’s gross margins for iPods in-line with what it was in 2007! Impressive.

Recently a small company called Psystar made a [and still makes a] generic Mac, and Apple immediately filed a copyright infringement suit [Psystar has countersued Apple and has charged Apple with restraint of trade, unfair competition and other violations of antitrust law. C'mon Apple, a certain amount of "generic" competition is OK, plus these guys package their computers in a generic box - no slick "I have an Apple" packaging.

Finally, Apple is the Cult of Jobs wrapped into a publicly traded company. The day that Jobs was rumored to have been sick, the stock dropped 5%.

Things Apple is not doing right:

1. Not being brave when updating the Nano.

2. Slighting their faithful.

3. Not marketing iPod Touch as a MID.

4. Gravitating towards proprietary hardware.

5. Once again, thwarting generics [which did them no good the first time around].

6. The Cult of Jobs - dependence on one single person.

Apple’s current line of products are still awesome, and I expect the company to not falter for the next twelve to eighteen months. But the end isn’t far from now. ^[2]

Notes: No positions in Apple, MT, IBM, MSFT. Long Intel.

The prominence of emerging markets in Asia will be another significant hurdle for Apple. With market share worldwide roughly half of market share in the US, Apple must fight diminished presence, a lessened "halo effect," and lower brand recognition. Given its very high price premium in a market that favors lower prices, Apple could fall significantly behind in the race for international clout.

The iPhone hype has sent Apple's stock to potentially unsustainable levels, as questions persist about the iPhone's future, the iPod's gradual saturation, and the Mac's sluggish market-share growth.

Sell Apple. Didn't I say this before?

Back on September 14th, 2007, I posted my first blog about Apple, and I disliked the stock.

Here is the original blog:

http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_doesnt_like_aapl.php

There were some who were upset with my thoughts and I felt rather alone with my skepticism. At that time I was concerned with AAPL's valuation, insider selling, a concern of a future "big bath" and momentum traders and momentum blogs.

AAPL was trading at about $139.

To be fair, I had mentioned GIB, CSC, XRX, NOK, CHT and TMX as alternative purchases. Since that time NOK, CHT and TMX beat AAPL. The others did not. So, I'm not always right.

On Sep. 20th, I made a follow up blog here:

http://www.investorplaceblogs.com/users/ahknaten/2007/09/ahknaten_likes_aapl_tables_app.php

In that article I spoke about how I loved the wooden tables at Apple, but disliked the stock. I was also concerned about the increased competition (threat of substitutes), the PE, price/book, insider selling, high accruals and Apple's ability to beat by 0.10 to 0.36 cents each month. Now, to some the ability to beat analysts by 0.10 each month was good... but I thought of it as a bad sign... as Apple should not be able to keep up with the momentum of surprising analysts continuously by 0.10. Were the analysts just dumb? Was Apple doing some funny accounting? How could this continue? I dunno? Something was odd. Especially for such a well followed company.

AAPL was trading at $141.

To be fair, I had complained of other 'momentum' stocks such as RIMM, RIO, JNPR, AMZN, FCX, CROX, VIP, NOV and GMST as other 'sell' candidates. These were other popular momentum stocks that kept showing up in blogs. I was getting frustrated. Of the stocks listed above only RIMM (up 0.9%), RIO (down -7.2%), and VIP (up 21.6%) beat AAPL. How did the other stocks do? Well this is how they did: AMZN (down -13%), FCX (down -22%), JNPR (down -28%), GMST (down -33%) and CROX (down -48%) !

NOTE - BE CAREFUL OF MOMENTUM 'HOT' STOCKS!!!

Sure, it increases the hit counts on websites and blogs, but does it really help? Maybe. Maybe not.

On Oct. 14th, I made another AAPL article here:

http://www.investorplaceblogs.com/users/ahknaten/2007/10/ahknaten_thinks_about_fscore_f_1.php

In that article I was concerned about the accruals (Sloan 1996), earnings momentum, prepaid stuff, valuation and a high 'F-Score' that Apple had. The 'F-Score' was a score that had some predictive power of guessing which companies might have some funky accounting going on. Note - I am not accusing Apple of anything, that score can also create a 'false positive'. I was just concerned that Apple had that score. Could they get a SEC investigation?

If you're interested more about the F-Score here is the paper by Dechow, Ge, Larson and Sloan

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=997483

AAPL had risen to $167. My timing on the stock was looking rather bleak.

On Nov. 3rd, I made another AAPL article here:

http://www.investorplaceblogs.com/users/ahknaten/2007/11/ahknaten_contrarians_apple_and_britney_spears.php

In that article I complained about a 'bullish (bulls***) pamphlet I got in the mail and recollected a few personal stories about previous predictions and market timing - but, I still disliked the stock.

Why did I use the word 'Britney Spears'? Very simple. Hits. Blog hits. Simple placement of nonsensical popular words might increase the hit count. In the last sentence I stated "Perhaps... timing Britney Spear's comeback is as hard as timing a price correction for GOOG or AAPL?". I think I was wrong. At that time GOOG was at $711 and AAPL was at $188. Now GOOG is at $566 (-20%) and AAPL is at $130 (-30%). In other-words, timing Britney Spears comeback is a lot harder than timing GOOG or AAPL.

What has happened since that first article? AAPL rose to a high of $203. My timing was off, but I feel much better now as it is trading at $130 and that's lower than it was during the first article. I feel good! Mind you, the market has had a bad time as well, but it is nice to see some of these 'momentum' popular stocks take a 'correction', and now I have a bit of confidence (I could still be wrong) that perhaps my original thoughts might be right. After enjoying 3 quarters of beating analysts by 0.20 or more, AAPL started beating estimates by only 0.14-0.15 cents and they revised their guidance for the next quarter. Here's a question. If AAPL revised guidance wil the analysts smarten up and change their estimates, or will something funky happen and AAPL still beat their own guidance by 0.10? I'm still pessimistic about AAPL. I still dislike the accruals, F-score, price/book, competition ("The Company expects competition in this space to intensify', insider selling (selling at around $185? - 'smart' insiders eh?), and the valuation. Oh, as for the F-score, funky accounting and SEC, I saw this on their 10-Q:

"While the Company believes it has made appropriate judgments in determining the correct measurement dates for its stock option grants, the SEC may disagree with the manner in which the Company has accounted for and reported, or not reported, the financial impact. Accordingly, there is a risk the Company may have to further restate its prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated."

Interesting, isn't it?

Sell. I still dislike it. But if you have an Apple wooden table, where can I get one?

And Britney Spears... best of luck.

One final note -- I had originally posted this at http://www.investorplaceblogs.com/users/ahknaten

Specifically in Macs and iPods, will pressure Apple to turn to other markets for continued growth. Apple's operating margins may also suffer from a decrease of revenue from these two sectors at a time when it most needs revenue to support its entry into newer markets. If this were to occur, multiple contractions would likely result and a significantly lower price would be realized.

Cannibalization. The proliferation of iPhones will come at the expense of iPod sales, as the iPhone includes an iPod.

Apple's intense reliance on having a steady stream of new and innovative products forces it to spend significantly on both advertising and research and development. If it tries to lower prices to increase market share, Apple's selling points--design and innovation--will suffer.

Always runs up into earnings and tanks.

HTC is a great company that is coming to kill Iphone.

"Take the most talked-about phone in recent history and launch it in one of the fastest growing cell-phone markets in the world, and you'd expect fireworks. But in India, where carriers Vodafone (VOD) and Bharti Airtel (BRTI.BO) have been offering Apple's (AAPL) iPhone since last August, unsold phones are stacking up at shops around the country. Apple won't break down sales figures by country, but a senior Airtel executive confirms analyst estimates that total official iPhone sales here have yet to touch 20,000 handsets. Vodafone, which has a lower-key advertising campaign, has sold even fewer, the analysts estimate. Even including sales on the black market, where the phone sells for half the $700 sticker price, the total only increases by an additional 15,000, according to an Indian customs official. That's puny, especially since Indian cell-phone providers have added nearly 20 million new customers since the iPhone's launch last year."

http://www.businessweek.com/globalbiz/content/apr2009/gb2009041_266236.htm?campaign_id=rss_tech

"A Wall Street analyst on Monday lowered earnings estimates for Apple's fiscal second quarter and year, marking a second whack from a financial soothsayer in the past few days.

Doug Reid, an analyst with Thomas Weisel Partners, lowered Apple's fiscal second-quarter earnings estimates from $1.10 a share to $1.05 a share. Its fiscal second quarter ends in late March. For the fiscal year, Reid cut estimates from $5.31 a share to $5.10 a share, according to his research note.

He also dropped Apple's 12-month stock price target by $10 to $120.

The lowered outlook for Apple comes amid a painful recession."

http://news.cnet.com/8301-13579_3-10191482-37.html?part=rss&subj=news&tag=2547-1_3-0-20

Steve Jobs is Apple - innovation as we know it today. With uncertainty surrounding his current medical condition and the extent of his future involvement with the company, investors on Wall Street are concerned of where Apple is heading in the near term and the long term. While not necessarily bad long-term, this could have large short-term impact on the stock price.

On January 21, 2009 The Wall Street Journal reported that the Securities and Exchange Commission has opened an inquiry into Apple Inc.'s disclosures about Chief Executive Steve Jobs's health

The Journal reports that "Investors and corporate governance experts have criticized the disclosures as inadequate"

Other things being equal, the limited release of information and the possibility of substantial health issues will tend to pressure the price of the stock, whatever the underlying merits

Too Risky for Now: http://www.ecommercetimes.com/rsstory/65861.html

Apple bears say Jobs' leave of absence raises near-term uncertainty as he is the company's chief innovator, deal-maker and a leader deeply involved in minute product decisions. His being sidelined for at least six months raises the risk of Apple being unable to sustain its record of innovation.

Beyond Jobs, some are also worried about how well Apple's high-end products will sell in a deteriorating economy.

"You're not going to miss a quarter because Steve Jobs is taking a break. My bigger concern is end demand in the weakening economic environment, given the fact that they play more in the high end of the market," said UBS analyst Maynard Umm, who has a neutral rating on Apple and $110 price target.

"I think expectations are already pretty low for the outlook so the real question is what's the catalyst to drive revenue and earnings again. It's unclear what the catalyst is given this weak environment."

Umm said it would be easier to make a bet when it becomes clearer how much the economy will hurt Apple's profits: "From my point of view, it's more of a wait and see. You have to see earnings numbers get reset for the rest of the year."

Calyon Securities analyst Shebly Seyrafi said the next few months will be very challenging for Apple.

"The stock could be choppy for the next few months," he said. "Q1 is going to be challenging for most tech companies. Even (Apple's) results may not be very impressive in the near term."

However, Seyrafi likes Apple for a 12-month horizon, assuming that that economy begins to improve in 2010, and he has an "outperform" rating on the stock with a $95 target.

Barry Deen ["Valuation (current price: $119")] argues that investment decisions should be based on "how a company is going to perform" and consideration of whether the stock is mispriced.

I would argue that ALL investment decisions should be made based ONLY on expectations of generating a profit and that ALL other considerations are ONLY tools to facilitate estimating that likelihood

Consideratings of book value, beta, and p/e multiples may help in assessing the degree of risk and whether you as an investor want to expose yourself to such risk but, while important issues, these are at best only ancillary factors on whether an investment is likely to generate a profit