Of the 56 analysts who cover Apple (AAPL), Edward Zabitsky of Toronto-based ACI Research stands out. He is the only analyst who rates Apple stock a "sell."
We imagine most investors would dispute the analytical merits of Zabitsky's call, particularly in hindsight. We imagine, too, that Zabitsky is quite aware of Apple's out-performance during the span of his coverage. Yet, rather than adjust his rating in light of a market intent on proving it wrong, Zabitsky has maintained his contrarian call, citing "intellectual" grounds. Naturally intrigued by this fearless rebel of an analyst, we set out to investigate his uncommon reasoning and determine for ourselves whether this 'road less traveled' leads anywhere of interest.
We gathered much of our information from a Bloomberg interview with Zabitsky from mid-February, as well as from an accompanying article on his stand-out call. We outlined below the four main reasons Zabitsky is negative on Apple.
1. Apple's app ecosystem is only a short-term fix to mobile computing. Much like AOL served as a beginning-stages portal for browsing and socializing an as-of-yet unrefined world wide web, Zabitsky views Apple's app ecosystem as an efficient intermediary between users and web applications only on account of short-term technological limitations. He points to slow mobile networks and the absence of the HTML5 platform in mobile browsers as necessitating a closed ecosystem like Apple's.
2. The rise of fast 4G networks, combined with mobile browsers' adoption of HTML5, will foster viable alternatives to Apple's closed app ecosystem. Once mobile devices are connected to fast and reliable networks, as they can be now with 4G, the HTML5 platform can be deployed effectively. The HTML5 platform is a sophisticated mobile-minded, web-integrated platform that facilitates the kind of functionality in Apple's closed app ecosystem while offering additional web-based flexibility like web storage. HTML5 is now widely included in mobile browsers, which Zabitsky believes should foster serious alternatives to Apple's app ecosystem.
3. The launch of Microsoft's (MSFT) mobile platform is an indication of Apple's waning dominance. Zabitsky believes Google (GOOG) also poses a danger to Apple's supremacy but cites Microsoft as the most significant immediate threat. Because Microsoft has so much at stake in breaking down the walls surrounding Apple's closed app ecosystem, it has become what Zabitsky calls the "real catalyst" behind HTML5. Through a partnership with Nokia (NOK), Microsoft is launching devices with its new Windows mobile software. If Sabitsky's prediction that Microsoft will be a serious contender in the mobile market holds true, Nokia stands to benefit immensely.
4. As competitor handsets gain wider acceptance, margins on the iPhone will contract. Zabitsky sees gross margin falling from its current 50% to somewhere around 25% as Apple is forced to cut prices to compete with Windows and Android phones. In the event of a price war, he holds that Samsung (GM:SSNLF) would be the big handset winner because it controls so many areas of production.
Zabitsky drives home a compelling reminder that the future of mobile computing is still open-ended. Talk of "product cycles" and transformative advancements in platform technology like HTML5 are important insofar as they demonstrate that regardless of how dominant Apple is today, tomorrow will bring new technology, new possibilities, and new advantages for competitors who are less entrenched (because they have fewer advantages) in the technology of yesterday.
But Zabitsky's calls on Apple are plainly over the top. He seems to use an objection to the core platform of Apple devices (a closed app ecosystem) as a catch-all justification for slashing price targets and maintaining his "sell" rating. Meanwhile, the impact of valuation and earnings growth on the stock price seems grossly under-represented in the analysis. The fundamentals don't support Zabitsky's negative outlook in our view, or in the views of the 55 other analysts who cover Apple.
Although we own Apple, we expressed our view last week that Apple may be a sell ahead of earnings on account of a surge of upward revised estimates for the quarter. We plan to sell before Apple reports earnings on April 24 with an eye toward accumulating in the aftermath.