September 10 May Be A Great Time To Put On An Apple Short

Aug.14.13 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) continues to shed market share worldwide in the face of strong competition from Samsung (OTC:SSNLF), Lenovo (OTCPK:LNVGF), LG Electronics (LG) and ZTE (OTCPK:ZTCOF) among others.

Worldwide Smartphone Sales to End Users by Vendor in 2Q13 (Thousands of Units)

Company

2Q13

Units

2Q13 Market Share (%)

2Q12

Units

2Q12 Market Share (%)

Samsung

71,380.9

31.7

45,603.8

29.7

Apple

31,899.7

14.2

28,935.0

18.8

LG Electronics

11,473.0

5.1

5,827.8

3.8

Lenovo

10,671.4

4.7

4,370.9

2.8

ZTE

9,687.6

4.3

6,331.4

4.1

Others

90,213.6

40.0

62,704.0

40.8

Total

225,326.2

100.0

153,772.9

100.0

Click to enlarge

Source: Gartner (August 2013)

Apple unit sales in the June quarter barely exceeded 2012 levels despite an estimated 46% growth in the market, with competing systems based on Android and Windows 8 outpacing iOS growth by a wide margin.

Worldwide Smartphone Sales to End Users by Operating System in 2Q13 (Thousands of Units)

Operating System

2Q13

Units

2Q13 Market Share (%)

2Q12

Units

2Q12 Market Share (%)

Android

177,898.2

79.0

98,664.0

64.2

iOS

31,899.7

14.2

28,935.0

18.8

Microsoft (NASDAQ:MSFT)

7,407.6

3.3

4,039.1

2.6

BlackBerry (NASDAQ:BBRY)

6,180.0

2.7

7,991.2

5.2

Bada

838.2

0.4

4,208.8

2.7

Symbian

630.8

0.3

9,071.5

5.9

Others

471.7

0.2

863.3

0.6

Total

225,326.2

100.0

153,772.9

100.0

Click to enlarge

Source: Gartner (August 2013)

Without a competitive lower-priced phone for markets outside North America, this trend is likely to continue. Apple may be planning to stem this tide with an announcement scheduled for September 10, 2013, where it is widely rumoured that Apple will at long last introduce a lower-priced smartphone. Whether this is enough to reverse share losses is another matter, but regardless there is a high risk of cannibalization of existing higher-priced and more profitable iPhones just as the iPad mini appears to have displaced sales of the regular iPad in the most recent quarter, a trend I infer from the lower margins Apple reported from its tablet sales.

In the long run, a cheaper iPhone is essential for Apple and the absence of such a device can only result in competing Android-based products continuing their relentless erosion of Apple's once prized position as the supplier of the world's most popular smart devices. Apple supporters have rationalized the loss of share by segmenting the market to exclude lower-priced phones; comparing Apple to Mercedes or Porsche in contrast to General Motors (NYSE:GM) or Ford (NYSE:F); and, calculating "share of profits" rather than share of device sales to sustain their apparent belief that the fall from $700 last October to the $400 to $500 range more recently was "temporary". The fall attracted activist investors like David Einhorn and now Carl Icahn, who appear to believe that balance sheet reorganization can "unlock value" as if they had insight into the Apple balance sheet that was opaque to all the other investors in the world, a situation that would be ludicrous if it was not so popularly believed.

Of course neither Einhorn nor Icahn really care about the long term success of Apple. What they do care about is the short term share price which, in an ideal world, would be lower when they purchased their shares and higher when they inevitably sell them to third parties who lack their sense of timing. It is always amazing to me how in North American stock markets so much attention is paid by investors to the share price on a given day in comparison to the long term strategic direction and sustainability of a company's growth and prosperity. This preoccupation is always based on the precept that if the share price can be driven high enough there will be someone willing to buy those shares at the higher value letting the activist realize his profit and have a wee giggle when the last buyers pay the piper.

The activism can only be distracting to management, who we expect to focus on design, production, distribution, marketing and sales but the activists demand this agenda be expanded to include the share price on a given day. Bill Ackman's foray into J.C. Penney (NYSE:JCP) has not ended well for the company or its shareholders, and his assault on CP Rail (NYSE:CP) may have increased the share price but has come at the cost of the tragic Lac Megantic explosion where a CP Rail subcontractor let an unmanned train loose on a small town wreaking death and destruction on its population. I am sure CP Rail would take the view that the accident was beyond the scope of its responsibility but that issue will be one for judges to determine in the fullness of time and the concepts of "due diligence" and "reasonable reliance" may become central at some point.

Turning back to Apple, the euphoria about the impending release of a cheaper phone and the involvement of Mr. Icahn present investors with a major opportunity to short into the madness or at a minimum buy puts as the stock rockets higher without regard to the fundamentals and the inescapable fact that Apple is and has been losing out to lower-cost competitors with excellent products and an ecosystem every bit as rich and exciting as its own. A lower cost phone will help but it is hardly rocket science and investors might take a moment to think about whether a lower cost iPhone will displace Android or simply cause customers to prefer it to the higher priced one they previously coveted.

I expect Apple will have difficulty maintaining earnings above $30 per share in 2014 and anything over a 15 multiple is unbridled enthusiasm so I would expect to see Apple fall at least into the low $400s in the early new year. If Christmas sales disappoint, which I view as likely, another trip into the $300s or lower is in the cards. My hat is off to Mr. Icahn for his courage. With his recent runs, it is a risk he can afford to take and the odd loss might look good on him.

September 10 will be interesting. Apple may surprise the street by announcing something unexpected like its long delayed iWatch or an iTV product Apple watchers have fantasized about for several years. Or it may simply announce a scaled-down Siri-less plastic phone priced in the $400 range and hope that the world flocks to Apple stores waiting in long lines to get their hands on one. Jimmy Kimmel can have fun with this one.

I will take advantage of the expected run up to add to my short. I am nothing if not persistent. As the old adage goes "Buy on the rumor, sell on the news!"

Disclosure: I am short AAPL. I am short longer term Apple calls at a $500 strike and long short term Apple calls at the same strike as a hedge. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I may short Apple stock or purchase Apple puts in the near future