6 Simple Reasons Why Betting Against Apple Now Is a Mistake

The Apple (AAPL) doomsayers had a field day last week when independent research company NPD announced that sales of Mac computers were down by 6 percent in January in U.S. stores. Based on that decline, Apple's market share dropped to 13.7 percent from 16.4 percent. A second study, by forecasting company ChangeWave Alliance, also showed an incremental weakening of Apple sales, particularly in the desktop segment.

We think these changes are borderline irrelevant. Apple continues to be the highest-rated stock in the "Piqqem Sentiment Index" and for good reason. Here's why last week's bad news and the subsequent price decline into the low $90s is actually a pricing anomaly pending a rebound into the low $100s as the news shakes out.

1) January is sequentially a very weak month for PC sales in general - Face it, few people buy PCs right after Christmas and even fewer in this horrific economic environment. It's hard to imagine a worse datapoint touchstone upon which to base a long-term decline trend. And a good portion of Apple's drop comes from its desktop segment. This makes perfect sense. Creative agencies and designers, deep in the deepest slump of their lifetimes, are cutting back as media spending craters. And consumers don't want to buy Apple desktops because the Mini and the iMac are both long-of-tooth with rumors of replacement models running hot and heavy. The upshot? This is the wrong time to do a comp.

2) MacWorld 2009 had very few exciting product announcements - Apple has tried to buck the January blues with killer product announcements at the MacWorld confab. This year, there simply were no major announcements. Sure, some nifty software enhancements, a moderately improved MacBook Pro but nothing to drive people to hit the buy button. So this January is probably even a weaker comp than past Januaries due to the lack of new product mojo.

3) Focusing primarily on Mac computer slowdown underplays importance of the iPhone - Andy Zaky has written about the massive cashflow that the deferred "subscription" based accounting Apple has elected to employ for iPhone sales will create over the next two to three years. Add to this the unbelievably rapid adoption of iPhone apps and the rapid transition to mobile computing as the most prevalent form of computing and it's clear that focusing most of your attention on the Mac computer lineup is akin to focusing most of your attention on sales of telegraph transmissions right after the telephone was rolled out.

4) The Coming Kindle Killer and Mac Netbooks -- This is a similar argument to the Boxee one above. I guarantee that in Apple's skunkworks there is a text reading product being readied for Market. The Kindle's rapid adoption for what is a somewhat clunky device and offering prices that are still very high for what people are buying clearly illustrates the market is ready for this type of device.

Should Apple come in with a Kindle-killer at a decent price and with a strong offering from publishers channeled through iTunes, this could be something of a small-sized iPod effect. True, the iPod has never packed the profit punch of the computer line. And a digital reader would, likewise, not pack the same punch. But it would provide an unexpected incremental boost. After all, iPod sales alone in 2004 had rocketed to $1.25 billion a mere two years after launch.

The Air laptops have been a moderate success addressing a premium market. But Apple could easily drop in a cheaper version of its Air to quickly capitalize on the rapid growth of Netbook sales. I'd look for an announcement on one or either of these products in June.

5) Overstating the Importance of Steve Jobs -- When Palm (PALM) came into CES with its new mobile OS and very cool touchscreen product, the geeks were wowed. A familiar name was largely behind that impressive product push -- Jon Rubinstein. Sound familiar? Yes, he was formerly the head of the hardware division at Apple. So what does this have to do with overstating the Cult of Steve? Palm designed a killer new product and got a huge marketing push on par with what Apple can deliver. It did this by rolling out a very nice product that was well finished and well thought out. A former Apple guy was a driving force behind it. And that's always been the case at Apple, too. Jobs has been the vision and the marketing muscle. But there are plenty of other people at Apple who are perfectly capable of putting together a Jobsian buzz effect.

6) The Balance Sheet -- Apple is sitting on $28.1 billion in cash, or roughly $31 cash per share. So subtracting out that cash, Apple's current share price would be roughly $60. Based on consensus analyst earnings estimates of $5.19 for the coming year (estimates that don't include the full impact of the deferred iPhone revenues), that gives Apple an insanely low FP/E of 11.5. That's a heck of a bargain. Even should Apple revenue estimates fall, bumping minus-cash FP/E upwards, the multiple is so low that it's hard to not jump in (just ask value players on CNBC Fast Money like the ever skeptical Jeff Mackey and Karen Finerman). Now, if Apple's downward trend picks up and NPD numbers start to get worse, then you might need to revisit. But at present, Apple has a nice shine to it regardless of what the Mac counting crowds say.

Disclosure: No position

Comments

[nine_yarder:]

Another possibility is that the price structure for cell phone contracts could change. If ATT wants to grab market share they could offer monthly contracts that are more affordable, and offer a subsidized iPhone nano. That would greatly increase apple's deferred earnings. A game changer once again for apple.

Feb 23 08:12 AM

[Techtrader10:]

If you look at the 6 points above and reverse the premise by saying "Here Are Six Reasons Why Apple Should be Sold" the reasons all work. 1. Weaking computer sales in general. 2. Lack of new products in the pipeline. 3. By the way iPhone accounts for less than 6% of Apples revenue, so not much help there. 4. This is the one I disagree with, you can not overstate the importance of Steve Jobs...without a strong innovative leader at the helm, the company will not thrive in the same way as it has since his return. Jobs has been the vision and the marketing muscle. 6. All that cash means the company is not going to efficiently use the money and it will dwindle. The company has not figured out how to efficiently use that money to date, what is going to change? The way to increase the price of Apple shares would be to pay a 4-5 percent dividend, as I don't see the company as the same dynamo as in the past.

Feb 23 09:12 AM

[mollytjm:]

great article...thank you! i was happy to see how easy it is to read a book on my iPhone and i thought, after downloading about 20 books!, that Apple could market it for this. If they make it slightly bigger, so people think 'paperback book' and market a device of this kind, they'll do well. But i think Apple also realized that they can target gamers too... that's the other think i do on my iPhone...play A LOT of games. i'm sure these products are in the pipeline and probably even better than i can imagine.

Feb 23 12:14 PM

[jenny:]

I guess I wouldn't say last week's changes are irrelevant, but that the 6 points you made eclipse last week's bad news in the long run. Clearly they had some effect as AAPL market share dropped to 13.7% and sentiment became really bearish (www.predictwallstreet....). But I think its more important that these are minor fluxes and that like you said, as the news evens out, AAPL could be in for a rebound.

Feb 23 02:35 PM

[neutrino23:]

I have to disagree with some of Techtrader's points.

2. New products in pipeline... You never know for sure what Apple has in the pipeline. Generally, Apple products appear without much advance information. This year we can expect to see a new iPhone, the release of Snow Leopard and updates to the iMac and more laptop updates. What we don't know about are the surprises. There have been some rumors about new hardware coming out.
3. iPhone revenues are stretched out over two years so they will continue to contribute during a downturn.
4. The role of Steve Jobs is unclear. I think a lot of people see in him what they want to see. I think we know two things about Steve. One, he has said that he hires the best talent he can find. Two, he brings a lot of discipline to Apple keeping the company on track.
6. What do you mean by using the cash efficiently? Seems like they've done OK with it. The cash has acted as a cushion to keep the stock price from falling too far. It has meant that Apple could continue to invest during downturns. They have used it to acquire companies such as P.A. Semi when needed. And it seems to be safely invested as they haven't lost it.

Feb 23 02:49 PM

[brewer:]

Only an uninformed fool would think Apple is not using it's money efficiently. They CLEARLY know what to do with their money.

Contrast that to Microsoft. Talk about not knowing what to do with money... They gave out a big dividend, then the stock tanked after about 10 solid years of no growth. They simply can't innovate for their lives. Look at Zune. Look at Windoze mobile. Hell, look at Windoze! What a triptych of embarrassment.

Apple is absolutely KILLING Microsoft and RIM, and all the win-tards and RIM-tard know it. Why do you think they hate on Apple so much? They criticise Apple and it's fans, call them names, talk about the 'reality distortion field' etc... Truth is, Apple gets it and develops the best products for people who appreciate it. The general public has caught on. Everyone wants a Mac, and I believe, eventually, they will have one. (Just because Windows is a blatant rip-off of Mac, doesn't mean it counts as a Mac.)

Feb 24 01:32 AM

[Zoltan L. K...:]

7) INTERNATIONAL EXPANSION. Apple is just scrathing the surface concerning the opening of retail strores and selling products internationally, especially in the largest foreign markets.

Feb 24 11:15 AM