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Summary

  • My steadfast assertions that Apple shares are overvalued have been proven wrong by the market.
  • I am conceding defeat on Apple.
  • The bulls have taken the win despite what I see as evidence Apple has serious structural issues.

Overview

Over the past year and a half, I've written a number of articles on Apple's (NASDAQ:AAPL) prospects. I was a bull; I owned the stock for a while and I believed Apple would grow into the stratosphere, as was the custom at the time in the investing community. Fast forward to last fall and I flipped; I realized Apple's growth projections were completely insane and that the stock couldn't grow forever. Couple that with Apple's lack of real innovation and margins that are depressed substantially from former levels and I predicted that Apple really wasn't that great of a deal at $500. However, none of that has mattered. The stock has skyrocketed to around $650 and I have decided to concede defeat. Before I get started, I have never shorted Apple and thus, have not lost a dime by being wrong. I simply missed out on the upside because I sold way too early.

Evidence

Apple still has stale product lines; each "new" Apple device for the past several years has simply been an evolution of the previous one. That is still as true as it was when I said it the first time and while this sentence is sure to attract tons of hateful comments full of the typical vitriol that is characteristic of Apple fan boys, it can't be ignored. The iPhone and iPad are terrific products but so are the alternatives from its able competitors. As Apple continues to simply produce the same product with a different number at the end of the product name, it will be surpassed. There is no innovation from the top after Jobs and buying Beats and Topsy is not the answer. However, it seems not to matter to market participants.

The constant drum beat of Apple TV and the iWatch and whatever other meaningless additions Apple has cooking will not drive material revenue increases. However, that is being ignored by market participants so it really doesn't matter if it's right or not. There won't be any actual innovation from Apple this year, or next year or the year after that. This company is not the same company it was and so investors shouldn't expect the same results. The company's desperate acquisitions of late at astronomical valuations are proof of this. But again, it doesn't matter.

Then there is the hope by investors that Apple will, at some point, pay some massive dividend to shareholders. While Apple's yield is decent at the current level, it's basically a market yield. The idea that it could be a dividend growth stock makes sense except that the projections are too high. I tackled this issue a few months ago I declared that Apple's dividend cannot possibly be increased to the point where it is $20 per share over the next five years, a number that was bandied about by a fellow contributor. That isn't really that much of a jump from the current $13+ given that Apple hasn't been paying a dividend for that long and that it has five years to increase it less than $1.40 per year.

Apple has a buyback program that is enormous to say the least and it now has tens of billions of dollars of debt to pay down. Apple can easily afford those things so that's not a problem but it can't do those things, pay a $20 dividend and make frivolous acquisitions like Topsy and Beats. Eventually, the money is going to run out and Apple is going to have to prioritize. Now consider that margins have been at risk for a while now and you've got a picture where Apple's significant cash flow is strained given its commitments. Does this matter? Nope.

The Bottom Line

The bottom line is that Apple mania has returned in full force and no investor will be told his shares are worth less than $1,000 or whatever the popular, unrealistic price target is these days. The fact that Apple hasn't actually done anything that justifies the move up in shares doesn't matter. The company is the same one that is losing margin and is being caught more and more everyday by its competitors. Management realizes this and has decided to simply spend all of its cash buying companies it doesn't need for stupid valuations and engage in the largest buyback in history while paying out a costly dividend. But it doesn't matter. And I give up.

The only thing to do now is either get on board the Apple train or get run over trying to short it. I, for one, am simply staying on the sidelines because I believe this train will wreck again, as it did the last time it was at these levels, but am not willing to get in front of Apple mania. If you are long, enjoy the ride but make sure you've got a sell target unless you want to see your shares plummet off the highs again. If you are short, you are a braver man than I because that is a recipe for disaster in the current environment. I am simply giving up on my arguments against Apple because the market has spoken and I was wrong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: Apple Bulls: You Win