For those of you too young to know, the phrase "Jump The Shark" is derived from a scene in the fifth season premiere episode of the American TV series Happy Days. In the episode, the central characters visit Los Angeles, where a water-skiing Fonzie wearing swim trunks and his trademark leather jacket, jumps over a shark. This marked the beginning of the end of the series popularity. It lasted five more years before being canceled but never once achieved hirer ratings since the fateful "Jumping The Shark" episode.
According to Wikipedia,
Jumping the shark became an expression used to describe the moment in the evolution of a television show when it begins a decline in quality that is beyond recovery. It is synonymous with the phrase, "the beginning of the end." In its initial usage, it referred to the point in a television program's history when the program had outlived its freshness and viewers had begun to feel that the show's writers were out of new ideas, often after great effort was made to revive interest in the show by the writers, producers, or network. The usage of "jump the shark" has subsequently broadened beyond television, indicating the moment in its evolution when a brand, design, or creative effort moves beyond the essential qualities that initially defined its success, beyond relevance or recovery.
Apple Inc. (AAPL) may have jumped the shark and reached its zenith.
Why Has Apple Reached Its Zenith?
Steve Jobs Is Gone - May He Rest In Peace
Steven Paul Jobs (February 24, 1955 - October 5, 2011) was an American businessman and inventor widely recognized as a charismatic pioneer of the personal computer revolution. He was co-founder, chairman, and chief executive officer of Apple Inc. He was an icon, more than a mere CEO. Jobs was the driving force behind innovation and the heart and soul of Apple. No matter how many people say that his passing will not affect the future of Apple, I must disagree. Those who forget the past are bound to repeat it. For those who don't remember there was a time when Apple found itself in no need of their great leader and fired Jobs in 1985. In a speech Jobs gave at Stanford University in 2005, he said being fired from Apple was the best thing that could have happened to him.
By 1996, Apple was floundering and directionless, being shellacked by none other than Bill Gates and Microsoft (MSFT) if you can believe that. I remember it well. I was in college at the time and was very interested in computers. They had just opened the first computer lab at the university. It was small and only a select few business students used it, prior to that you wrote your papers on a word processor (when I started college it was a type writer). I remember trying to memorize the DOS commands and staring at the blue screen wondering how to make the thing work on the first computers. Then came Windows 1.0 which was better but still clunky. Then the computer lab opened a new section for the Macintosh computer from Apple. I was intrigued. Using the icons and mouse to manipulate the computer was so much easier I was hooked. I kissed the old PC computer goodbye for good, I thought.
But then came Windows 2.0 and shortly thereafter 3.0 was released by Microsoft Corporation, oddly enough with the help of Apple and Steve Jobs. Windows 3.0 surpassed Apple's operating system. Apple had agreed to license certain parts of its GUI to Microsoft for use in Windows 1.0, but when Microsoft made changes in Windows 2.0 adding overlapping windows and other features found in the Macintosh GUI, Apple filed suit. Apple added additional claims to the suit in 1994 when Microsoft released Windows 3.0. An eerily telling moment occurred at the beginning of their relationship with Jobs giving a speech touting the benefits of Apple's and Microsoft's joint venture and Gates appeared on a gigantic big screen behind him dwarfing Jobs and looking like the proverbial cat about to eat the canary.
Windows 1.0 was Microsoft's first attempt to implement a multi-tasking graphical user interface-based operating environment on the PC platform and it was a failure, but the 3.0 version outperformed Apple's System 7 and since most businesses at the time were based on the PC platform I switched back, along with most business students and business people leaving Apple relegated to the graphic arts people who are the genesis of today's Apple cult like following. Microsoft became the high flier of the 1990s, not Apple. I remember thinking there was no way the rocket trip would ever end; Microsoft's stock share price would reach the heavens. Well, it ended shortly thereafter in 2000 and Microsoft has been dead money for ten years plus no matter how much money they make. People are still talking about it, but their prayers for Microsoft's growth resurrection have gone unanswered.
Fortunately for Apple, in 1996 when Apple was on the brink of disaster, Jobs was still alive and Apple announced that it would buy Steve's new company NeXT for $429 million in a last ditch effort to save the company. The deal was finalized in late 1996, bringing Jobs back to the company he co-founded. Jobs became de facto chief after then-CEO Gil Amelio was ousted in July 1997. The rest, as they say - is history. Jobs was able to turn the company around and bring it back from the edge of bankruptcy to eventually becoming the largest company on the planet for a short time recently, ushering in the death knell of growth, the law of large numbers. The of law of large numbers means a company cannot continue to grow at the current scorching growth rate due to its size and inevitably fails, which leads me to my next point.
Parabolic Trends Are Unsustainable
A parabolic buying trend occurs when a stock experiences a swift price upsurge such as the case in Apple. When you review the chart, you see the price creates a parabolic design moving up 300% from $100 in 2009 to over $400 today. The speedy escalation is characterized by greed and jubilation. Investors are mezmerized by prices increasing so rapidly in a short time. The greed is rampant and contagious, driving more investors to pile in. Those left out hear of the gains and throw more money into the stock hoping to make a fast profit exacerbating the issue.
Nevertheless, the parabolic move is unsustainable and inevitably breaks down. When the party is over, it's not unusual to see a stock lose the entire gain in a matter of weeks.
click to enlarge
Charts provided by Finviz.com
Competitive Environment Is Intense And Vicious
Unfortunately, Apple finds itself without Jobs now, and I can't help but think there may be another Gates around the corner to steal Apple's thunder once again. Perhaps Google (GOOG) might with the help of its Android operating system, a Linux based operating system for mobile devices such as smartphones and tablet computers coupled with Samsung Electronics (GM:SSNLF), the world's top maker of memory chips and smartphones. The South Korean firm, which surged past Apple as the world's top smartphone maker in the third quarter, is quickly building on its supremacy with sleek designs and a rich product line-up surpassing the likes of HTC, Nokia (NOK) and BlackBerry maker Research in Motion (RIMM).
Samsung has come out of nowhere and within a year become the preeminent smartphone provider. Samsung recently stated they see record fourth quarter results even in the face of Apple's new iPhone 4S. For the fourth quarter Samsung expects to sell 35 million smartphone units, which will be the largest number of phones ever sold in a quarter. This is in spite of high profile launches by Apple and Nokia. Samsung's current weakness or opportunity however, you choose to perceive it, is the tablet market.
The Android operating system used for the current tablets has inherent flaws. Samsung's next generation of tablets will be based on a windows platform provided by Microsoft, Apple's arch nemesis. Additionally, many are touting Apple's foray into the Chinese market as the new growth engine for Apple, but Samsung is also moving aggressively into China and I don't see it as a slam dunk for Apple.
At the very least, Apple's profit margins will suffer from the increased competition and even Apple's earning guidance which stands by the age old parable of under promise and over deliver will fail causing a massive sell off and a break in the trend.
Moving from Growth to Value
This is a key point in my argument. Microsoft is the perfect case study for Apple. When Microsoft grew into a behemoth and began declaring dividends, that was the beginning of the end for its growth and the start of the decade of dead money which it finds itself extending as of today. When I started hearing pundits calling for Apple to declare dividends in late 2011, I saw this as a warning sign that the era of Apple's extraordinary growth may be coming to an end. The people caught up in the euphoria can't see the forest through the trees, which leads me to my next point, the contrarian mindset.
Whenever you find yourself on the side of the majority, it's time to pause and reflect. - Mark Twain
What a great quote from Twain. Let's reflect. A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive optimism about a stock or sector can drive the price so high that it exaggerates the investment's future prospects and belittles its perils. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett and Whitney Tilson, who just made a mint from shorting high flying Green Mountain Coffee Roasters (GMCR). People bearish on Apple are non existent, which underpins my thesis.
Apple is a great company with solid prospects and a bulging balance sheet, but so is Microsoft and it has been dead money for a decade.
With Samsung aggressively taking market share and the technoloigical advantage of Apple's products dwindling as it did in the mid 80s when it faltered previously, coupled with the law of large numbers, the loss of their iconic innovater, the incrediblely parabolic chart, the seeming shift from growth to value by the louder and louder calls for a dividend in 2012 which sounded the death knell for Microsoft's share price ascent, I posit Apple may have reached its zenith.
I am not saying Apple is going to tank tomorrow, but it may be stuck in this range for quite a while and enduring a similar fate as Microsoft did in the year 2000. Your money may be better put to use in another stock with the same growth prospects and less issues with competition and shear size.
Many people have argued that the fact that Jobs is no longer with Apple is reason enough to turn bearish on the name. I submit this may be the least of their problems going forward. Jobs knew he was soon going to pass for many months. He most likely worked diligently on future products in an attempt to ensure his legacy survives.
I am saying this may be a stalling point for Apple based on these factors unperceived by the current shareholders caught up in the irrational exuberance of the unfettered advance for the last three years.
Much the same as when people believed that housing prices would always go higher from 2001 until 2007 brfore the house of cards toppled, even though the base argument that your investment was in solid real property you were able to enjoy much like the argument you hear regarding Apple cash hoard lowering risk. I remember the mantra was, "Buy Land, They Ain't Making Any More Of It." Well, apparently that didn't matter.
My recommendation is at least to put a stop loss order to protect your gains if you are a current shareholder or take your profits and employ a reallocation strategy. If you are not a shareholder, I would not buy at these levels and in turn look for a better opportunity for growth in a much smaller company.
Please use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.