Tuesday, May 19, 2015

The Case Against Apple (AAPL)

First and foremost (and just for the record), no, I don't have a short position in Apple Inc. (NASDAQ:AAPL). It's a point that needs to be made clear early, to stave off the lynch mob that will most assuredly develop after I dare to suggest AAPL is anything but a perfect stock. This isn't a "hit piece". It's just a handful of things for everyone - bulls as well as bears - to consider before making any long-term conclusions about Apple.

With that out of the way, here goes ... AAPL has become a company with some systemic problems that will be difficult to overcome. Although it hasn't gravely impacted the stock's price yet, eventually (and sooner than later), Apple's share price are going to be affected.

The overarching problem, but in a way the overarching symptom too, is the fact that Apple has decided to compete on price. Case(s) in point: The lower-cost iPhone 5C, and the decision to give away - rather than sell - the upgrade to its Mac operating system.

As for the 5C, what's interesting is that the pricier (by $100) 5S counterpart has found more demand than expected, while the 5C has been met with a lukewarm reception; Apple Inc. has already cut orders for the lower-end version of the newest iPhone iteration. Point being, the company was (relatively) wrong about the low-end consumer.

That's not necessarily a bad thing. If nothing else it underscores the fact that Apple is a premium brand that can still command a premium price ... though not everywhere the company was supposed to want to do well, and needed to do well. I'm talking about China, where the price of the 5S is about $870, versus the 5C's price of about $730. For only $140 more, those consumers can buy a considerably more powerful machine, yet both are still at the extreme high end of the price range most Chinese consumers are willing able to pay. Domestically - and this is telling - the now-cheaper 4S is being seen as a better device than the 5C, negating the need for an upgrade for some users who were on the fence, depending on price.

The numbers in themselves won't kill the company. But, the fact that Apple worked so diligently to bring a phone to the market that it didn't really need to forces an investor to wonder what else the company could be wrong about, marketing-wise.

(Side note: For all the discouraging numbers I could poke and prod here, none of them changes the fact that the debut-weekend sales of the 5C and 5S were record-breakers for the company's iPhone division. It's an admittedly-conflicting factoid, though it doesn't alter the bigger message here.)

The decision to offer a free operating system upgrade is no less questionable. Oh, it's a convenient and polite offer, though also a tad gimmicky. This isn't a full-blown "reformat the drive and install the new OS" kind of thing that we saw between Window 95, 98, Me, XP, Vista, 7, and 8 (or between NT and 2000); comparing the way Apple offers new operating systems to the Windows' naming and delivering of new OS's is like comparing apples to oranges; the iOS upgrades and updates aren't nearly as dramatic. But, that didn't prevent the company from polishing and presenting the news as a game-changer. Most likely, the upgrade is designed to get and keep users more deeply engrained in Apple's digital content ecosystem. It's not a bad idea, but not a game-changing one either. Indeed, in many ways it will quell the need for current Mac owners to buy all new hardware.

And in that light, one has to wonder if Apple's decision to offer OS X 10.9 was a "want to" situation, or a "have to" situation. Indeed, some onlookers are suggesting that Mac products are nothing more than a side project now. Perhaps Apple is giving it away because there's no point in trying to sell it.

Hot Specialty Retail Stocks To Buy For 2016

The bigger point is (and this has been the much-debated 800 pound gorilla in the room for a while now), AAPL isn't innovating. It's reiterating. The functional and meaningful difference between the 5S and the 4S - from an end-user's perspective anyway - isn't that significant. A lower-priced version of the phone doesn't exactly scream creativity.  Ditto for the iPad and the iPad mini. The mini has been cannibalizing sales of the full-size iPad for a while as well. More over, while the newly-unveiled versions of both are superior to their predecessors, the wow-factor of each subsequent update or newer version is getting sequentially smaller.

Point being, Apple is slowly losing its luster. Maybe it's because Steve Jobs is no longer around. Maybe it's because the competition finally caught up with Apple. Maybe it's because the company stopped innovating and just kept regurgitating newer versions of older products. Or (and this is most likely), maybe it's a combination of all three.

Whatever the case, there are numbers to support the philosophical idea that AAPL is now longer growing, but instead is simply treading water. Mark Rogowsky over at Forbes has the details, in a set of simple charts, that explain how newer and better products hasn't actually helped the company much in a couple of years. Growth seems to have peaked in 2012, even though we've seen several key product launches since then. Revenue is rising a little, but earnings are falling a lot. An iPhone 6 or an iPad 6 (maybe in 2014?) isn't going to change that; the next version of those products is likely to create less excitement than the recent unveilings did, because - and despite all the technical upgrades - consumers have an increasingly "been there, done that" perception.

To be fair, Apple could still coast for years on its name alone. But, it's not the growth company it once was, and it won't be again until it starts to create new products rather than rehash the old ones. In the meantime though, know that 2013 is starting to look like the year where a lack of innovation is really starting to take a measurable toll on the accounting statements... especially in terms of profit margins. The most recent quarter should be a decent one, as it will include 5S and 5C sales. If history is any indication, however, that revenue and any corresponding profits will start to wane - a lot - by the following (current) quarter, leaving growth-hungry investors waiting for an encore they may not get. Holiday gift-buying may be all that prevents the current quarter from being anemic, which sets up a really tepid beginning to 2014.

Apple's going to need to really wow us in 2014. Otherwise, it's just another consumer tech stock.

If you'd like to get more trading ideas and insights like this one, sign up for the free SmallCap Network daily e-newsletter. It's full of stock picks, market calls, and more.

No comments:

Post a Comment