A recent article about Apple (AAPL) caught our attention. The author lists 28 points why Apple will fail. We try to offer a rebuttal or a balanced reply to each of those 28 points in this article. Readers will get a clear picture if they read both articles side by side as this piece does not include the points mentioned in the original piece, except the heading of each of the 28 points.
Parabolic price increases. The stock has already had a pullback of more than 10% from its recent high. Why? Something changed about Apple? No. Did the management mess up something? No. So what was it? Pure profit taking. What people forget to remember when talking about the so called "Parabolic" run is that the PE was just catching up with the latest earnings per share. The December 2011 quarter EPS of $13.87 replaced a $7 EPS in the trailing twelve month EPS.
Massive market cap. There is no rule written anywhere about how high a company's market cap can go. If companies stop innovating or the competition catches up, they fail. If Apple keeps innovating there is no doubt its market cap can go higher. Just because other companies did not achieve something doesn't rule out Apple or any other company for that matter from doing it.
Relative value very unappealing. We wonder what is unappealing about Apple. Is it being debt free? is it the $100B cash? Is it the PE of 15 when your growth rate is much higher? Again the same point about market cap being high does not have any significance. We are not really sure what does diversification have to do with Apple being a large company?
Rising competition. Perhaps this is one of the genuine risks for Apple. But so far, Amazon's (AMZN) Kindle is very clearly being treated as a distant second in the tablet market. Samsung's smart phones are a threat but when it finally comes to bottom-line, Apple eats a vast majority of the profits, in spite of having fewer models.
Extreme expectations (earnings). A PE of 15 tells us investors and analysts do expect earnings to slow down. But given Apple's history of innovation (yeah, Steve Jobs is not here) and the cash balance, we believe Apple is safe. Also, let us not forget the newly instituted dividends which would eventually steady the shares.
Extreme expectations (price targets). Again, the price increase has been in line with the earnings. If anything, the PE has in fact not caught up with the earnings so far. Sure, there is no place beyond #1 to go but you can keep increasing your distance from #2.
Disappointing earnings or guidance. This point is not too different from the two bullets above about expectations. Again, a low teen PE does show people expect things to slow down.
Stagnant products. The supposed impanel could be the next game changer. Mobile payments is another place Apple is expected to make great progress. Again, the argument is pretty weak and any company "could fall".
Product cannibalization. Wonderful. So, the most successful of Steve Jobs' and Apple's strategy is now a threat. As Mr. Jobs himself said "If you do not cannibalize and keep moving your products, someone else will kill your products."
Post-Steve Jobs era. Again, Steve Jobs himself told the new CEO, Tim Cook to run the company the way he sees it and not how Jobs "would." Obviously, Apple and Jobs planned about iPhone and iPad long before the products were announced. It has not been even a year since Jobs passed and people really believe the new few products from Apple did not have Jobs' blessing or his input? We find it strange that the people who just love and admire Jobs for what he did would believe he just left the company the hands of worthless leaders.
Culture change. So why exactly is Apple no longer "cool"? Because of the dividend? The statement "investors will complain in the future" is just a prophecy and has no backing with actual facts. People lining up for the new launches says otherwise. People are right now complaining about not having enough products.
Fundamentals already priced-in. This again seems more like a prophecy than a statement backed with facts. Companies like Microsoft and Intel have similar PE as Apple. And it is mind boggling to think the difference in earnings and growth rates. If fundamentals are priced in, Apple should be trading near its growth rate and now much below it. A PEG ratio of less than one says the valuation is still very sane. Talking about $600 price tag or $600B market cap with no reference to earnings is misleading.
Everyone knows about Apple already. True, when you want a two bagger and three bagger, it is best to look for the unknown companies. But what about the risk? There is no mention of that. A lot of investors would pick a steady 10% to 15% return from companies like Apple instead of seeing their investment disappear with risky new ones. Ask people who shoot for 2 or 3 baggers, like SA contributor Mr. Bret Jensen. He picks a lot of risky names because he is a master and knows not everyone of them would click.
Forward PE very misleading. Fair enough that forward PEs are misleading. But given Apple's conservative nature and history of sand bagging, one can safely assume their own projects are the bare minimum to expect. And even that leads to a low forward and current PE.
Investors will lose faith and sell the stock as it underperforms. Is this not true for any stock? If people lose faith they sell it - be it Apple or any other stock on the planet. Where else do you see people line up days in advance to get their hands on the products. It might not be wrong to assume the same people who love the product would stick with the stock as well. This is a very weak point again.
Poor use of cash. If anything, this should be seen as a positive. Companies usually waste their money on "di-worsification" and get into things they have no clue about. Apple has always been very careful about this. And the recent dividend announcement is encouraging as well. One can make a bet that Apple will in due time be seen as a dividend growth company as well.
Rising input costs. A brand like Apple can easily pass on the extra cost to the consumers and it has a history of doing so. Also, let us not forget Apple is led by perhaps the best supply chain brain in the world, Tim Cook.
Will have to lower prices. So introducing a low priced iPad is a bad move and at the same time Apple having to reduce prices is bad as well? Pick a side. The company knows well enough when to rely on margin and when to rely on volume. The low priced ones will certainly make up in volume for the margin lost as more people will buy.
Phone carriers will cut subsidies. Fair point. There has been a lot of noise about the subsidy recently. But think of this: who would take the first blow? AT&T (T) or Verizon (VZ)? Remember they cannot conspire and go against Apple as its not legal. So if T makes the first move, what if Apple strikes a deal with just VZ. Or the vice versa?
Patent battles. Perhaps this is where the "poorly used cash" will help Apple? Connect the dots and you know why the company protects its cash like a hawk.
Anti-trust problems. It is nowhere close to being a monopoly. Duopoly maybe with Apple and Samsung (OTC:SSNLF)/Google (GOOG). Maybe the cash cushion helps here as well? There are not a lot of times that Apple loses these legal cases. Ask Samsung.
Poor working conditions in factories. Nothing has changed on the negative side. If anything, Tim Cook's recent visit to the plants and his open communication about the labor conditions are positives and one of the areas where perhaps Apple might benefit because of the change in leadership.
IPO frenzy and technology bubble 2.0? If there is a general market sell off as stated in the original point, then stock market is not the place to be. It is nothing specific to Apple. On the contrary, the heavy valuation placed on those new firms might force investors to realize Apple is actually very undervalued. Two sides to a coin.
Global economic slowdown. A reasonable point that when things get tough people might think twice before spending hundreds of dollars on gadgets and this applies to all stocks except the staples. But with Apple expanding globally, one might expect the risk to be mitigated if not totally eliminated. Also, as mentioned earlier, Apple has its loyal fans who buy no matter what.
Failure to catch on in China. Apple's market share in the U.S. market is lower than Android's but who gets the profits? Apple is not a volume player. It is a margin player. And in a market as big as China's, there can be multiple winners.
Apple virus. So it has taken what two decades to have the first such report? And people would rather prefer having daily issues with other PCs? Strange.
Slowing momentum and weak technicals. Refer the first point of the rebuttal. And the RSI is less than 30 as of April 24th.
Big insider selling. The top executives get paid more in options than in direct salary. Everyone needs money to pay for their home and other things. The stock ran up after Tim Cook exercised his options. There is a world of difference between people making use of their options and direct dumping of shares.