Many familiar with my work have often labeled me an "Apple hater" or an "Apple basher". I certainly can see why my writings can be interpreted that way and, frankly, I don't think I've done a terribly good job of really laying out my position on Apple (NASDAQ:AAPL). Part of that is due to the fact that my view of the company has evolved dramatically over the last two years. However, I'd like to step back and clarify - once and for all - what my real views on the company are.
Apple Is Amazing - I Get It
Apple is a wonderfully run company. While I think that the late Steve Jobs was an unparalleled CEO, I do think that Tim Cook is a superb leader. While I do get the sense that some of the analyst community tries to "bully" him (and certainly individuals like Carl Icahn are most certainly trying to do so), I admire that Mr. Cook is able to stay the course and keep to Apple's ultimate mission of designing the world's best products and letting profitability flow from that.
I also admire that the company is very focused on developing just a few products each year. Each device from Apple is an extremely well thought-out harmony of hardware and software that, frankly, no other company on the planet can match today. Apple designs world-class operating systems, world-class silicon, is unmatched in hardware industrial design, and has a very valuable brand. Oh, and on a more personal note, the company has absolutely the best customer service that I've ever seen. Apple stores are absolutely wonderful.
Why Don't I Own The Stock?
I'll be frank; while I am a huge fan of Apple's products (I think they are by far the best in their respective categories), I can't find myself to be all that bullish on the stock. Why?
Well, it's simple. Anybody who has used the latest iPhone 5s and has compared it with, say, a Samsung (OTC:SSNLF) Galaxy Note 3 or Galaxy S4, will notice that Apple's phone is simply smoother and faster. There's not a hint of "lag" or "stutter", and frankly, even the iPhone 4s feels "smoother" than Samsung's "finest" products. However, despite these "subjective" observations, Samsung's products still sell like hotcakes.
What's even more troubling is that Samsung's Android phones aren't even as good as the devices from its competitors such as LG or HTC. Yet, thanks to an astonishingly large marketing budget, the company has been able to gain share/momentum extremely quickly. Further, thanks to Samsung's "conglomerate"-like structure, it controls just about every major part of the supply chain, from displays to DRAM to applications processor fabrication. It is the "lowest-cost producer".
So, my big fear - and the real reason I don't own the stock - is that I fear that if a company like Samsung that puts out, in my view, obviously inferior products can gain so much market- and mind-share, then is Apple's moat defensible long-term? Does the broader market care about amazingly slick operating systems and beautiful industrial designs? Can't Samsung simply "copy" anything that Apple does and then brute-force its way to market share gains?
The truth is, I don't know the answer to this, until I see some more conclusive evidence that Apple's moat is indeed deep and wide, and that Samsung can't take market share just by "copying" anything that Apple does.
That's Why I Care So Much About The "Big" iPhone
I am planning to watch the launch of the next generation "big" iPhone(s) very closely. According to The Wall Street Journal, Apple is planning to launch two iPhones in the next generation: a 4.5"+ display and one with a 5"+ display. I personally think that this is an "obvious" move that Apple should have implemented a while ago when it was clear that the Galaxy Note and Galaxy S began to gain so much momentum. Apple shouldn't try to capture both the low end and the high end (I agree with the strategy of trying to own just the high end), but it should really cater to the demand for all screen sizes at the high end. There's no reason not to, particularly as Apple could charge a premium for, say, the 5"+ variant over the 4.5"+ variant.
My guess is that Apple will launch these two flavors of the iPhone 6 and then the company will start to take some very serious share from Samsung at the high end. If this actually begins to play out (and we'll all have a good sense of this probably within the first few days of launch), then I will be more than happy to allocate a sizable portion of my portfolio for what could potentially be a run to $700+, since there is a LOT of growth to be had if Apple can take away even 20 million of the roughly ~40 million units sold per year of the Galaxy S flagship models (~20 million units by $700 per unit works out to $14 billion in incremental revenue). Similar levels of incremental revenue could be achieved by taking share from the Galaxy Note flagships too.
However, if even these phones fail to gain significant share against Samsung's high end, then Apple really does look fairly valued today and not really something I'd want to tie up a huge amount of capital in.
Icahn Really Worries Me
I also worry that Apple is going to do something stupid on the capital allocation front because Carl Icahn wants to bully Apple. One of the reasons that I like Apple is due to the fact that the company has a gigantic cash hoard that can be used strategically if need be. It's a beautiful cushion and I think Icahn needs to sell his shares and leave if he's going to push for Apple to load up on the debt just for a short-term pump of the shares engendered by a buyback. I know for a fact that Icahn doesn't give a hoot about Apple's long-term prospects and just wants to pump the share price up to make a fairly quick gain. Having this kind of investor pushing management and the board around is troublesome.
So, there you have it. I do like Apple quite a lot and would like to see this innovative company succeed brilliantly against the likes of Samsung, which exhibit neither the creative spark nor the finesse that Apple routinely shows year-after-year with its iOS products and with iOS itself. I also want to see Apple successfully push back against Icahn. The stock price will go up in a sustainable fashion commensurate with free cash flow growth, not because Apple loads up on a bunch of debt and introduces temporary buying pressure on the stock.
If I begin to see evidence that Apple will completely and utterly own the high end of the smartphone market by taking meaningful share from Samsung, then I have no problem owning shares at these levels or perhaps a bit higher. But if Samsung proves too powerful a force, then it'll be very tough for me to want to get on board. I'll still probably buy a new iPhone every year, and I'll still probably watch/follow the company, but I won't put my own money on the shares in that case