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Apple: A Senseless Selloff?

Sometimes market participants overlook the value case for a stock, but this is impossible for Apple (AAPL) as it is by-far the most reported-on stock in human history. Do you think market participants have no reason for dumping Apple? Saturation is the reason, and it comes in three forms: old, new, and stock.

1) Old Saturation

The old markets are saturating. There are too many recent iPhones and iPads in circulation. The newest versions are incremental improvements, and they won't keep up with the next generational leap, which is Glass (GOOG). Too many people have these old devices already--this saturation which killed PC sales is creeping into Apple's mobile devices.

In terms of the next generation, besides Google, I like what Nuance (NUAN) and Spansion (CODE) are producing in voice recognition, and believe the two stocks are cheap if paired equally together.

2) New Saturation

The new market for smartphones, tablets, and laptops will be more efficient. There is too much redundancy in all these devices. Eventually, someone is going to competently integrate the smartphone and the tablet, turning two markets into one. The same could happen with the tablet and the laptop -- although this super-device is definitely not Microsoft (MSFT) Surface! Overall, we could see three markets slowly shrinking to two.

Someone will figure this stuff out and disrupt everyone else in the space. The next Apple may be Lenovo (OTCPK:LNVGY) (OTCPK:LNVGF), which is known for quality design, and by the way will be the top smartphone seller in China next year, says Gartner.

3) Stock Saturation

Everyone who wants to get long Apple has done it already; sure there is "dry powder" among bulls, but there is no "new money". It is tragic to see alpha chasers sucked into trends at the last minute--but many will have the instinct to cut their losses quickly, which partially explains the latest selloff. There will be a huge, huge selloff from the newer wave of investors as soon as Apple's stock breaks lower (assuming Cook doesn't pull off a coup and make exclusive deals with content producers for iTV).

What about investors around the developing world? Will investors in the emerging global middle-class invest in American stocks? Probably not, because they are witnessing higher growth rates in the real estate and businesses around them. If anything they will be buying up truly globalized conglomerates like Proctor and Gamble (PG) and Coca Cola (KO).

Divestment Thesis: Slowdown

Apple stock is cheap on basic metrics, arguably near the bottom of a technical range, and likely to go up for a while as many hedge funds continue to lean on it. However there is substantial downside risk both in the short term and the long term. Investors who have done quite well allocating heavily to Apple over the years should be winding down to a more conservative position.

Investment Thesis: Asia Speedup

Consider Lenovo--market cap of $85bb; P/E at 20 is relatively cheap, because earnings per share are shooting up:

Q1Q4Q3Q2

Data from Lenovo.

2012/13 $1.332011/12 $.632011/12 $1.462011/12 $1.38
2011/12 $1.082010/11 $.422010/11 $.982010/11 $.76

Check out the ThinkPad product line if you haven't already, and you may agree that it is lovable. Consider how many early investors got rich with Apple stock: they saw quality in the product. Here's what a guy in the industry whom I trust told me about Lenovo:

I am not surprised by Lenovo's growth in smartphones. Back when Lenovo acquired IBM's (IBM) personal computing division I saw the global emergence of Lenovo. Lenovo at that time was simply a China/Chinese product.

When [a buyer outside China] was looking for a bid for [a large quantity of] computers, I worked with the major players in the region. IBM and Hewlett Packard (HPQ) had the largest distribution and the most support centers around -- they were sure they would win the bid.

I said to the senior people there to watch out for Lenovo because the Chinese can withstand losing money to "advertise" their brand. They also "installed" an American CEO -- who was once Dell's Asia Pacific President. Sure enough, Lenovo won the bid and so went Lenovo's progress in Asian countries.

Where many acquisitions go the way of asset stripping, key to Lenovo's strategy was keeping the PC division intact and R&D in the US. And low prices!! Even today, their prices are slightly cheaper and sometimes more innovative/creative than other major brands.

Lenovo is also the official supplier of technology to the Chinese government so there's a lot of guarantees that they would do well a long time.

I would bet on Lenovo to come up with a cell phone solution that the Chinese government would adopt!

Source: Apple Stock Is Cheap, But So Are Used iPhones: Is Lenovo Set To Overtake It?