Buy Apple Long, Sell Palm Short

Regular readers, my colleagues and just about everyone else I come in contact with know I’m a big fan of Apple, Inc. (Nasdaq: AAPL). I’ve written about it here on several occasions, my family and I own a number of its computers, and we’re all “packin’ iPhones”.

So when it comes to reporting on it, you could easily come to the conclusion that I’m about as far away from an unbiased journalist as you can get.

But you’d be wrong. You see, I also own a computer that runs the Windows operating system published by Microsoft (Nasdaq: MSFT) (not because I necessarily want to, but because I have to). I used to own a Palm, Inc. (Nasdaq: PALM) Treo smartphone, too.

I’m not going to write another article that’s solely a comparison of Apple’s products to its competitors. There are plenty of writers out there doing that already.

Besides, Apple is so far ahead of its competitors in product design and functionality that it’s hardly worth the comparison, except in a few cases.

But what about Apple as a company? What sets it so far apart from others in the consumer electronics sector? More importantly, how is it as an investment? Is it far ahead there as well? The short answer is a resounding “yes.”

The company rarely fails to disappoint, both on the design side and especially when it comes to revenues and earnings. The company takes a lot of heat from analysts due to its conservative stance when it comes to forecasting revenues and earnings.

But which would you rather have? A company that makes wild forecasts and rarely meets them, or one like Apple that consistently beats them? I know what makes me feel better (analysts are just like you and me in that regard).

The Mt. Everest of Cash Piles vs. Mounting Debt Pile

Apple’s balance sheet is the envy of Wall Street: It’s sitting on a mountain of cash – north of $31 billion – and not one shred of debt. An enviable position anytime, but even more so in the current recessionary climate.

Palm, on the other hand is sitting on a pile of mounting debt, and if its current losses continue, it will soon be faced with raising more cash. Not a good thing if you’re a Palm shareholder.

Here’s the bottom line on Apple as an investment: If you’d bought a few shares of Apple as a Christmas present for someone back in December 1980, they’d be your best friend. The stock has climbed 4,463% since then.

But they would be calling you names had you bought them a few shares of Palm, which has declined 97% since March of 2000 (its public debut).

How Does Apple Do It?

Ok, I’ll forget the product comparisons, but just consider these incredible facts:

• Forget the fact that its iPod has dominated the portable music player market, completely changing the way music is sold at the retail level…
• Forget for a minute that its computers command a significant price premium over similarly configured Windows machines…
• Forget that so many mobile phone companies came before it, with pricing plans cast in stone…

The company’s management is the proverbial outside-the-box thinkers:

• When Apple decides to enter a particular space, and introduce its initial product, it nearly always changes the ground rules, completely upsetting the apple cart for its competition.
• And just when a competitor thinks it has Apple’s product strategy figured out and manages to introduce a “me-too” widget, Apple introduces a faster, better one with even more features that customers want.

Notice I didn’t say cheaper: There’s never been a company in modern history that’s monetized great consumer product ideas the way that Apple has. I defy you to name one that’s done it as well.

The best part about Apple is that every time a new would-be competitor comes along, the mainstream media hacks decry “the next iPod killer,” or “the iPhone has run out of steam.” Nervous investors sell, and long-time Apple shareholders just buy their shares.

Palm’s Pre: The Next iPhone Killer? You’ve Got to Be Kidding…

Right... The latest “iPhone killer” was supposed to be the new Pre smartphone, introduced with much fanfare by Palm this past January. So where is the Pre now?

Judging from Palm’s latest anemic sales numbers, the Pre’s going nowhere fast. Even faster than most analysts estimated. So it’s not surprising that investment firms are starting to reverse course on Palm. Morgan Joseph recently downgraded Palm to a Sell rating, stating Palm is failing to meet even the lowest sales numbers for the Pre.

In a last ditch attempt to save it, I expect Palm to announce pre-holiday price cuts to try to spur sales. It won’t work, of course, and the Pre will go the way of Microsoft’s Zune music player… down and out of the picture.

Morgan’s sell target is $7.50 a share, and with Palm shares currently trading in the range of $13, shorting the stock seems like a viable idea for those investors wanting to capitalize on the negative aspects of Apple’s rising dominance in the smartphone market.

iPhone: It’s Already the Smartphone Gold Standard

The iPhone on the other hand, is so popular, during its recent earnings conference call, Apple announced that it’s having trouble keeping up with demand.

It’s no wonder: There’s more than 60,000 applications available for the iPhone, from seeing the weather where you’re standing, to reading MRIs on the golf course, and just about everything in between.

When it first came out, few analysts gave the iPhone a chance against Research in Motion’s (Nasdaq: RIMM) very successful BlackBerry devices. But that, too, is rapidly changing, as Apple is making significant inroads into the educational, corporate and government smartphone markets.

Now Apple’s competitors are starting the all too familiar “me-too” look alike product changes. Flattering, but futile. I predict that Apple’s iPhone will continue to gain market share, and in a few short years, relegate most of the competitions devices to also-ran status.

And you just might want to be along for that ride.

Comments

[MacaM:]

Dear David,

I'm 100% with you on the strength of this great company and I honour a P/E ratio approaching 30 still a solid choice for the long term, especially with the cash at hand. However, I would not recommend buying it now because the market is way overbought and even Apple will go down in the correction. Wait for the turn would be a prudent advice in my view.

Regards,
MacaM

Aug 23 08:03 PM

[Techtrader10:]

Mr. Fessler doesn't make any disclosures, however I would guess from the glow I see emitting from the article, not only does he own Apple products, he must also own Apple stock. I agree with MacaM, the people purchasing AAPL here are following the bigger fool theory.

Disclosure: no current position in AAPL

Aug 24 10:06 AM

[Jon T:]

APPL LONG guys, not day trading....

The long term future of this stock will at some point - quite soon? - become meteoric. I'd hate to have given advice the meant someone missed the boat.

By all the metrics, by sheer demand, APPL is one not to miss.

Just one article, today, gives you the idea: www.bloomberg.com/apps...

Aug 24 10:16 AM

[mollytjm:]

great article! i know a lot of Seeking Alpha readers are day traders, but if you're a value investor, then Apple fills all the requirements for a 'must buy and hold'.
A lot of investors don't really understand tech companies. It's not enough to have one good product or one popular product if you just stay with it and cash in for years, like Sony did with the Walkman or Microsoft did with Windows and Palm did with the Treo. They took the profit and took their time...to do not much. Finally, when a real winner arrives they decide it's time to try and innovate and compete. Too little, too late. Apple has the iPod, Leopard OS and the iPhone, answering all the above...and blowing them out of the water. And whatever comes next will do it all over again.

The name of the game for tech companies is fast, GOOD innovation and a profitable product. No one does it like Apple. No matter how popular a product is, they keep innovating and making it better. It's a great company and I'm happy to own stock in it.

Aug 24 10:35 AM

[brewer:]

Apple is not a blue chip stable company, except on the surface. They are instead, thriving with a smaller market share. They have 90% share to take from the unbelieveably inept Microsoft, RIM, etc... who's products look like some soviet autos when compared to Apple's stuff.

Apple just makes the best tech there is, and it only cost a few bucks more (if any!) more than the substandard dreck from it's so-called competitors. Anyone else that tells you different is either lying or just stupid.

Aug 24 10:49 AM

[jimocarroll:]

Just for the record, what is APPL?


On Aug 24 10:16 AM Jon T wrote:

> APPL LONG guys, not day trading....
>
> The long term future of this stock will at some point - quite soon?
> - become meteoric. I'd hate to have given advice the meant someone
> missed the boat.
>
> By all the metrics, by sheer demand, APPL is one not to miss.
>
> Just one article, today, gives you the idea: www.bloomberg.com/apps...;sid=aK4TfewPa37M

Aug 24 06:43 PM

[Remon:]

David,

Your article basically says that Apple can do no wrong, and, as a result, that its competitors are all doomed. Apple is a terrific company, and I long ago gave up my Microsoft computers in favor of MacBooks, and I'm a satisfied iPhone user as well. Yet it can a terrible mistake to underestimate the competition. Companies at the height of their success seem invincible, but that is just an illusion. Remember IBM? How about DEC?

Talk of "iPhone killers" is the stuff of journalists looking to sell copy. But dismissing Palm because some misguided pundits have given the Pre that appellation is dangerously naive.

From a pure technical point of view, the Pre's WebOS one-ups the iPhone operating system. It is a wonderfully clean, elegant, and well-though-out piece of work. It starts where the iPhone left off and takes it to the next level. If you play with it for a while you will begin to understand the limitations of the iPhone. Try going back and forth between a website you are reporting on and an email you are composing, perhaps while listening to Pandora in the background. A scenario like that is common on laptop computers, and the Pre can do this flawlessly. It's just not possible on an iPhone today. I didn't even realize I missed it until I tried the Pre.

I'm certainly in no position to say whether the Pre will be enough to reverse Palm's fortunes. But the achievement should be respected and not dismissed with a "You've got to be kidding." Is your memory so short that you don't remember Apple teetering at the brink of extinction before Jobs came back to save it? At the time most would have given Apple the same odds they now give Palm.

Remon

Aug 24 11:28 PM

[Nettligent:]

Palm is overvalue, high risk, media spins and full of hype

Aug 25 06:10 AM

[Reality Person:]

Palm made me $14 on the dollar. Apple won't make me crap cause its so over priced its not even funny. Besides people where did Apple come from? Eventually the company had to start somewhere.

Aug 25 05:08 PM

[Ricard:]

Not sure about the AAPL long argument. It is priced well beyond its cash hoard. I do agree about its management's execution, well done on painting the picture.

On PALM, I'd say that if you're gonna short this stock, do it big. Buy out of money options expiring this winter. This company's been a dog ever since it got bought out by 3Com (another dog). They both have the same fleas.

Aug 25 08:07 PM

[Reality Person:]

Don't forget too that Palm is going to have a similiar management style as Apple now that they have their new CEO (forget his name at the moment) that came from Apple. You can already see a direct similarity in style and setup on the new Pre compared to the iphone. so it may be a company to keep an eye one. If they want to shed their fleas as you say they have some work to do for sure but I wouldn't title this company as a dog at least for their future path. Time will tell.

Aug 27 10:28 AM

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Sep 08 06:07 AM