Is Apple Really A 'Buy'?

| About: Apple Inc. (AAPL)

I have been in the investment profession for over 20 years and a passionate student of stock market history. I have seen very few companies become so enamored as much as Apple has over the past few years. Evidence of this Apple bullishness is supported by the proliferation of bullish Apple articles on Seeking Alpha and Jim Cramer pounding the table on the stock. (I find Jim to be a self-promoting contrarian indicator.) It is also supported by the three problems I see with Apple.

First, it is bumping up against the 'Law of Large Numbers'. The 'Law of Large Numbers' says that the larger a company gets the more difficult it is to grow. In 2012 Apple generated $156.5 billion dollars in sales. To illustrate the immense size of Apple, If you were to compare Apple's sales to the GDP ranking of the 128 countries across the world, Apple would rank 57th in size. This would fall ahead of New Zealand's GDP of $153.3 billion and behind Ukraine's GDP of $157.6 billion. (Note: GDP stands for Gross Domestic Product. It is the dollar value of all goods and services produced with a country's borders.) So Apples sales are larger than more than half the countries in the world! I think this is an amazing statistic. In a decade or so we will look back and say, "What were people thinking?" When ranked by market capitalization, Apple is also the largest company in the world. Historically, the largest company has underperformed the stock market indices by about 5% a year. There is an old saying that 'trees don't grow to the sky'. I think Apple has reached that point.

The second problem with Apple is the competitive dynamics of its industry. The industry operates in a declining pricing structure and has short product life cycles. So Apple has to frequently create innovative products that over time will have decreasing profitability. This is anything but a good long-term business.

Third, history is littered with consumer electronics companies that have seen their stocks soar, only to come crashing down when technology changes or the company experiences an operation misstep. It not a question of if this will happen, but when. Some examples of the numerous companies include:

  • RCA or Radio Corporation of America, which fell 98% in the 1930s from its 1929 peak.

  • Polaroid and Eastman Kodak (EKDKQ.PK), tech icons from the 1970s, which went bankrupt in the past few years.

  • Sony (NYSE:SNE), the 1980s and 1990s consumer electronics giant, whose stock is down 93 percent from its 2000 peak.

  • Nokia (NYSE:NOK), the dominate maker of cell phones in the 1990s whose stock is down 94 percent from its 2000 peak.

Research In Motion, Apple's predecessor as the dominant smartphone manufacturer, whose stock is down 92% from its 2008 peak.

I am in no way predicting the imminent demise of Apple. It does have some potential moat like characteristics to its business. However, my point is that successful investing requires buying companies when the odds of investment success are in your favor. Based on the three aforementioned problems with Apple, I think the odds of investment success are low. As a result, you won't see me buying Apple anytime soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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