Apple (NASDAQ:AAPL), which most recently recorded $171 billion in revenue for FY2013 and yielded more than 20% of that revenue in profits appears to be experiencing success unmatched by any company in recent history. The iPhone 5S maker, which used its colossal profits to add to its enormous cash piles after handing out sizable dividends and buying back shares, doesn't appear to satisfy the likes of Michael Blair, a Seeking Alpha blogger, who has maintained that Apple is a losing stock, continuously dishing out negative sentiment since April 2013, when Apple was close to its 52-week low of $390. Here are just some of the excerpts from his articles:
On April 19th, 2013, Blair stated, "With the stock off 40% from its 2012 high, it is a solid but unexciting investment today. That may change if and when it introduces new and exciting products."
Besides for existing product refreshes, "new products" were not introduced. Apple's performance since article: +33%; S&P 500: +16%
On April 22nd, 2013, Blair added, "The quarter will be a non-event, in my view, unless it is a major miss and that seems unlikely."
The quarter led to an Apple bull-trend. Apple's performance since article: +33%; S&P 500:+15%
On May 22nd, 2013, Blair continued with his negative sentiment, adding, "But unless Apple can match the power, performance and battery lives of the emerging competitors it risks becoming less competitive and over time could become an also ran in this game.
"As a result, I am long Intel and BlackBerry and recently closed out a very profitable holding in Microsoft. I am also short ARM Holdings and from time to time short calls on Apple."
Apple's result since article: +17%; Blackberry and Intel results since article: -58% & +5%, respectively. S&P 500: +8%
Based on the abovementioned articles, Blair appears to suggest that losing smartphone companies like Blackberry will succeed and winning companies like Apple will lose. Despite his abovementioned views being entirely wrong only eight months later, he didn't stop there. His negative Apple sentiment has only intensified as Apple's price per share has defied his continuous criticism and crossed into the low $500s.
His use of the word "perilously" suggests that Apple is in a desperate state - as if the company is ready to throw in the towel.
This is a company that celebrated record shipments during its last quarter (most phones shipped during the fourth quarter in its history) and a company that boasted iPhone gross margins in the mid-40% range, by far the highest in the smartphone industry.
The argument Blair alludes to in his latest article goes something like this: Because 81% of the world's smartphones shipped in 3Q13 operate on Google's (NASDAQ:GOOG) Android operating systems; that this somehow implies that Apple is losing the smartphone war. This of course is an extremely warped and incorrect view and anyone making an investment decision based on this view should understand why it's wrong.
First of all, cross-firm smartphone comparisons should be based on annual numbers, not quarterly!
The use of "14% market share" by collecting numbers for only one quarter is what I consider cherry-picking and individuals should not rely on these statistics as the basis for their investment. Why? Since the iPhone 5S was released late in the last quarter, a very limited amount of 5S demand was fulfilled during the period. The 5S demand is expected to be massively fulfilled during Apple's holiday quarter, especially since the supply issues have been largely muted.
On the other hand, Samsung, which released its Galaxy S4 during 2Q13, fulfilled the majority of its S4 demand during 3Q13 allowing Blair to use the mismatch in refresh cycles to cherry-pick and critique Apple.
Instead, Blair should have used the annual unit shipment number to even out what I call "refresh spikes," which occur in different quarters at different companies. At Samsung it was last quarter; at Apple, it will be during the next quarter. This allows for a more reliable cross-firm comparison of hardware shipment performance.
OK but Apple's market share is still significantly lower, right?
But is Apple really losing market share and is the company facing distress in its smartphone shipments like Blair suggests?
I will discuss a few points in order to address this question.
• Forward Expectations
According to Blair's ABI argument, Apple's main supposed competitor is Google. But is Google a true Apple competitor? Apple and Google operate using entirely different strategies with entirely different end-goals.
Apple creates a state-of-the-art operating system to drive mostly hardware sales, as well as iTunes and software revenue. Google too creates a respectable open-source operating system to drive primarily advertising revenue.
The distinct end-goals lead to the following strategic plans.
Apple: Sells premium hardware products by targeting consumers with higher degree of buying power through wireless providers.
Google: In distributing its operating system, Google targets hardware makers across different segments (think cheaper) with the goal of expanding its advertising revenue through the mobile space.
These unique strategic goals are important as they allow companies to co-exist and grow together as is the case with Google and Apple.
The majority of consumers targeted by hardware companies running on Google's operating systems likely have never been in the market for premium phones; therefore these hardware corporations are no threat to Apple. For example, an individual in China making $3000 is likely not going to spend 27% of his or her annual salary on an iPhone. Apple doesn't mind that. Alternatively, the majority of iPhone users will usually stick to the premium segment. While some iPhone users might peel off to other top range phones offered by companies like Samsung or HTC, the majority of Apple's consumers will remain loyal to the iPhone as their premium choices are limited and switching costs remain high (whether you like it or not, Apple makes it difficult for consumers to switch. As a shareholder, I don't mind that). Additionally, as Apple expands its operations by entering new geographic segments, the company will attract new consumers in the premium segment. Therefore, segregating into premium, mid-range, and bottom-tier categories of this market is critical and would entirely transform these market share views. Why is it necessary for investors to segregate? It allows them to better project the gross profit/operating profit outlook, which is essential for forecasting EPS growth.
Segregating into segments would also automatically give Apple a dominant share of the premium segment. This is crucial - with few competitors in the space, it defines the pricing relationship Apple has with global wireless providers. It means Apple controls pricing because a lack of competition means their customers will likely pick Apple and this is precisely why Apple dictates 46% gross margins, something other companies envy, but haven't been able to match!
Can Apple heavily expand in the premium segment?
With few competitors in its premium space, of course it can.
Can Apple expand at the same pace as Google's open source operating system across those wide channels and cheaper products?
To answer that question, I would like to use an analogy to translate Blair's operating system argument. Let's say a certain company named Coogle creates interiors for automobiles. They stick advertising all over their nicely made car seats and give them away for free. In this hypothetical scenario, Kia, Hyundai, Toyota, and Mitsubishi are all very interested. Cheap automakers we've never heard of in China express interest as well. Coogle experiences heavy growth in its "Interiors for Cars" division, likely because its products are free, as the cheaper low-end/mid-tier automakers don't mind the idea of getting something for free and flock to Coogle. Good for Coogle.
At the same time, a premium company named Audi continues to heavily expand as well by introducing innovative quality automobiles. Audi does not stop being successful just because Coogle effectively plugged in car seats into cheaper autos.
Someone like Blair would then apply the Google/Apple comparison by saying that according to automobile interiors, Audi's market share has fallen to "perilously" low levels simply because Coogle is succeeding in creating interiors for Kias and Hyundais. Sure, there will be MANY MORE Coogle interiors out there than Audi interiors, but surely we are not going to conclude that premium automakers are in a desperate state because more Coogle car seats are being shoved into cheaper vehicles.
The burden remains on individuals like Blair to provide investors with actual evidence that iPhone consumers are turning away from the iPhone and perhaps even crossing into different lower-end segments, placing Apple into the supposed "perilous" state as he suggests. Based on Apple's growth, surveys, financials, my above analysis, and other widely available evidence, this is clearly not the case. Apple continues to break sales records with the highest smartphone margins in the industry.
In a world of complex strategic corporate decision-making, investors should analyze companies using appropriate metrics to make investment decisions. As I've mentioned in the past, bloggers will often selectively pick information that is favorable for their articles, but ignore other information that weakens their argument, a behavior known as selection bias and something that can lead to terrible investing results.
I do believe that due to outstanding corporate leadership, both Apple and Google will not only co-exist, but will both lead in their respective industries. Apple will continue leading in the premium hardware segment and Google will continue onboarding its operating systems onto cheaper products - something that will lead to heavy advertising revenue growth.
Disclosure: I am long AAPL. 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.
Additional disclosure: This article represents my views only and not the views of any company that I am affiliated with. This article is intended for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation, or endorsement to buy or sell any security or private fund.