Psychologist B.F. Skinner described "cognitive dissonance" as a form of preferential thinking. Quoting an article by George Dvorsky entitled "The 12 cognitive biases that prevent you from being rational"
"We love to agree with people who agree with us. It's why we only visit websites that express our political opinions, and why we mostly hang around people who hold similar views and tastes. We tend to be put off by individuals, groups, and news sources that make us feel uncomfortable or insecure about our views. It's this preferential mode of behavior that leads to confirmation bias . . . - the often unconscious act of referencing only those perspectives that fuel our pre-existing views, while at the same time ignoring or dismissing opinions - no matter how valid - that threaten our world view. And paradoxically, the internet has only made this tendency even worse."
I have written a number of articles that set out a factual matrix consistent with a rational conclusion that Apple (AAPL) faces headwinds in continuing to grow in a rapidly maturing and highly competitive smartphones market limited by economic and demographic factors. These articles prompted a spate of outrage among Apple enthusiasts often including criticisms of me rather than the facts presented.
I then took the same factual matrix and presented the facts in a light positive to Apple in an article entitled: "An Apple Bear makes the case for Apple at $1,000 by 2017". I was immediately and overwhelmingly rewarded by having the same commentators thank me for my candor, objectivity and compelling logic. The facts are the facts. The conclusions and judgments are your own.
In short and in no way colored bullet points, here are those facts:
- Apple sells only smartphones with a price well over $400 (well known)
- Less than 2.4 billion of the world's population have the financial resources to buy a smartphone (demographic data from credible sources)
- Almost all of those 2.4 billion people own a smartphone today (arithmetic)
- Smartphones priced above $400 represented about 32% of smartphone unit sales (Gartner)
- The addressable market worldwide for Apple iPhones is 768 million customers (arithmetic)
- Users buying smartphones costing over $400 on average buy a new phone every 2 to 3 years (Qualcomm)
- The demand for smartphones over $400 is no more than 384 million units (arithmetic)
- The premium smartphone market is growing at about 10% annually (Lenovo)
- Apple sold about 150 million iPhones in fiscal 2013 (reported)
- There are competitors for $400 plus smartphones - Samsung, LG, Sony, Lenovo to name a few (indisputable)
- Competitors like Samsung have user satisfaction ratings as high as the iPhone (J.D. Power)
- Larger screen smartphones called "Phablets" where Apple has no current offering are growing very rapidly in the premium segment taking share from conventional smartphones while displacing tablets (Technalysis Research).
Charts and tables from the bracketed sources were presented in the previous article.
The case for Apple reaching 215 million iPhones by 2017 requires them to win about 38% of the 2017 smartphone market at the $400 plus price point (arithmetic).
With a view to those facts, judgment must prevail. My judgment is that this is a tough row to hoe, and I am bearish on Apple. Others can form contrary views that not only will Apple enjoy a 38% or high market share of the premium end but also it will find new avenues for growth that supersede its reliance on iPhones.
Now that commentators have backed off their personal attacks and found enough Christmas cheer to be pleasant for the most part, let's turn back to the investment thesis.
I believe Apple shares are vulnerable because the company's financial performance is highly dependent on iPhones sales in a market that is maturing and where Apple has been losing market share. Prices and margins in that competitive space are under pressure. Electronic device prices tend to fall over time as component prices fall, a trend well established in the PC industry where laptops have fallen from over $10,000 to less than $500 over 20 years.
Competitive ecosystems that rival Apple's now exist. Microsoft (MSFT) is making a determined move into smartphones. New entrants like Xiaomi, Coolpad, Micromax, Oppo, Gionee and others are finding customers and growing quickly.
Reviews of the iPhone 5S have been pretty solid, but not world beating. Digital Trends gives the iPhone 5S four and one half stars, a very high rating, but its viewers award the device only two stars.
The Nokia Lumia 1020 received four stars from Digital Trends and three and one half from viewers.
The LG G2 beat both receiving not only four and one half stars from Digital Trends but also four and one half stars from viewers.
The point is not to say the Lumia or LG phones are in any way better than an iPhone. That is something each user can decide for themselves. The point is that consumers have very good choices that compare well to Apple's offering and it is no longer the case that Apple's elegant iPhone 5S is the sole candidate for a premier tiered smartphone. It is just the most expensive candidate in a crowded field.
The smartphone space is not a cake walk. With respect to those who choose to be bullish, I am bearish on Apple. I will open the New Year with a short position. Accordingly, I have purchased Apple puts with a $500 strike price expiring in April 2014.
I wish you all every success with your investments.
Additional disclosure: I hold AAPL $500 strike April 2014 puts, betting the price will fall below $500 before the puts expire