By Thomas H. Kee Jr., Stock Traders Daily
I warned that Apple (AAPL) may be reaching its high-point in March, 2012; it seemed out of the question then, but since then there have been warning signs, top executives departed, and I heard something much more important to growth and margins recently. Initially I warned that Apple was gouging its customers; I consider its customers to be the service providers like Verizon (VZ), Sprint (S), and AT&T (T), because they are the channel through which AAPL sells its products regularly. Although that initially looks great to the bottom line and margins it also creates a divide that can become pronounced, especially if those retail items that were at the center of the divide lose favor, become less popular, and consumers begin to turn elsewhere.
My key point in this first quarter was that consumers are also fickle, products move in and out of favor regularly, trends can turn from popular to unpopular overnight, and if the situation presents itself where the divide mentioned above occurs at the same time a product starts to lose its momentum serious problems could follow. That can lead to changes in analyst opinions and impact stock price as we know.
Specifically, in situations like the one mentioned above margins could come under even more severe pressure than what would be normal because the retailers (service providers) will promote products that afford them a better return and skew the percentage of sales even more than might otherwise occur. This is the way of business: companies attempt to earn the most they can, it is simple capitalism, and this is part of the problem I foresaw after the first quarter of this year.
Furthermore, as the year continued, the competition - Motorola and Samsung specifically - have caught up and in many cases surpassed Apple. If nothing more, competition has become fierce, so I have recently begun to investigate using a "Random Walk" approach. I have been visiting retailers and asking a simple question: Are you selling as many iPhones as you did before?
Resoundingly, the answer starts the same way: 'we sell a ton of iPhones.' However, as I dig a little deeper I also discover that the proportion of sales are changing meaningfully. I have learned that the percentages are changing from what used to be 75% iPhone - 25% others to 60% iPhone - 40% others. Others obviously include the Droid and other phones using Google's (GOOG) operating systems, and BlackBerrys by Research in Motion (RIMM) but I did not go into detail about the percentages of the others.
Whether consumers are buying lower price point was unclear; in fact, it sounded as if the level of spend was the same, but they were just opting for other than iPhones more often. This defines a loss in momentum for the iPhone, which is the foundation of Apple's earnings and revenue, and margins too of course. The competition has caught up with Apple. I warned about this in the first quarter, and we are seeing it unfold in front of our eyes now.
Beware of a company that has a divide with its retailers, especially when their products lose momentum. What might otherwise be a slight reduction in margins could become much worse if the retailers start to push other products more aggressively.
Although I pulled off the short I had on AAPL when the stock broke above $640, we transitioned to the 2 x Short on the NASDAQ 100 (QID), which is largely influenced by AAPL, and that position is up about 10% since then.
Important: I am not saying that Apple will stop selling iPhones, iPads, or anything else. I also expect them to sell quite a bit, and I expect the loyal followers of Apple products to keep buying as much as they can, but the momentum has shifted, Apple-products are no longer cutting edge, and unless that changes, the margins pressures can cause earnings and revenue to slow considerably, and multiples to contract.