Apple: Where Is The Inflection Point?

| About: Apple Inc. (AAPL)

In my article Everybody Loves Apple I couldn't find any analyst that's negative about Apple (NASDAQ:AAPL). But there is one, the guy is called Ed Zabitsky.

Ed Zabitsky of ACI Research appeared some weeks ago on CNBC to explain why he thinks shares are a sell. His reasons:

  • There's an inflection point happening, and Wall Street is oblivious to it

  • Web apps are the way of the future

  • Android is on the rise

Ed is the only analyst that has a sell rating on Apple (AAPL). He missed completely the run since 2009. One thing I agree with him, the Apple share price cannot go up forever, but could, of course, still go significantly higher. As John Maynard Keynes said "markets can stay irrational longer than you can stay solvent".

Where is the inflection point and is Apple reaching this point?

George Soros described the Boom-Bust Model in his book "The New Paradigm For Financial Markets" (pg. 65-66) published in 2008: (Click to enlarge)

Chart: The Boom-Bust Model

The model consists of seven phases:

The Boom-Bust Model

In the initial stage (1) the trend is not yet recognized.

Then comes the period of acceleration (2), when the trend is recognized and reinforced by the prevailing bias. That is when the process approaches the far-from-equilibrium territory.

A period of testing (3) may intervene when prices suffer a setback.

If the bias and trend survive the testing, both emerge stronger than ever, and far-from-equilibrium conditions, in which the normal rules no longer apply, become firmly established (4).

Eventually there comes a moment of truth (5), when reality can no longer sustain the exaggerated expectations, followed by a twilight period (6), when people continue to play the game although they no longer believe in it.

Eventually a crossover point (7) is reached, when the trend turns down and the bias is reversed, which leads to catastrophic downward acceleration (8), commonly known as the crash.

It is quite possible that we are currently experiencing the late stage of phase four of Soros' model, i.e. severe detachment of Apple share price from the equilibrium conditions, which culminates in the peak of the cycle, followed by accelerating decline:

It seems that the growing trend in Apple shares was successfully tested at the turn of 2008 and 2009, and accelerated significantly according to the model, to enter the current far-from-equilibrium territory.

As the boom bust model suggests, the inflection point is reached when earnings per share are still growing.

There are no limits to Apple growth, right?

I think there are. As we all know developers play an important role in the growth story of Apple. Developers will go where it's easier to make money in the long-term. As an investor in apps, I receive many updates from the developers how things are going.

One of these updates I want to share, without mentioning the game.

The game only sold 4,633 copies to date. We peaked at 662 per-day on March 10th, but it quickly went downhill and for the past two days the sales have dropped to 100/day. It will get better on weekends, but the average is still well below what we were hoping for.

To put things in perspective, in order to pay back your investment at the 54% interest rate, the game has to sell 40,000 copies. But if sales don't improve, the process may take a whole year before everyone is fully paid back.

The big question now is, why are the sales so low when the reception has been so good? It's hard to give a sure answer. It's a mix of different factors, but one issue is that nowadays there are just too many new games released each day.

To be honest this is not the only developer that had high expectations. There are just too many IOS apps and it becomes more and more difficult for the tens of thousands developers to earn a living with Apple. In fact, it becomes unattractive to developers to only make IOS apps. There are over 425,000 apps in Apple's App Store and over 200,000 in the Android Market. The Windows Phone Marketplace is currently in the 5 digits.

Eventually a developer could be better off with Android or Windows.

Does this trigger an inflection point? No, of course not, because Apple is growing at such a rapid speed in emerging markets. But this could be a sign that things are changing.

I'm fully aware that the Soros' model mentioned in this article may be wrong or inadequate for Apple's situation. I also realize that prices in the far-from-equilibrium area do not follow any strict rules. Hence, there is a high risk in going against the prevailing bias. Just look at Ed, already bearish for such a long time.

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