What Will An Apple Bubble Look Like?

May. 2.12 | About: Apple Inc. (AAPL)

I would like to thank all my readers (and the patient SA Editors) who have been with me since my first SA article "Apple: If I could buy and hold one stock, this is it" was published on Aug 2011. As of the time of writing, that $50,000 portfolio would have been worth $91,114 (102 shares x $611.50 + $28,530 for the 325C Jan LEAPs + $211 cash) or an 81% return in less than a year.

Just like I closed my bearish thesis on Research in Motion (RIMM) early this year, I think it is time for me to move from writing mostly about Apple and instead focus my efforts in refining my Moneyball approach in trading the markets.

I was talking to my wife about life and death in general last night (seeing the changes in our kids as they continue to grow and mature made me philosophical) and I told her that whoever invented the "process" of life wasn't very efficient like Apple (NASDAQ:AAPL). Why must most of us age and medically suffer on our way to our deathbed? Why couldn't we start our lives being a geriatric (use the wisdom we gained as we progress younger) and what better way to end it than with a bang as....a sperm? I'm still hanging a 12" CRT TV in my dog house. I forgot she was religious. She said "If you are such a smarty pants, why don't you tell me how this Apple thing will unfold?"

Why not use my time in the doghouse useful? Don't worry, I'm not pulling an Ed Zabinsky here (he called Apple a short at $199 in 2010). IF The Ugly Truth was a bear, excluding macro-economic factors, here is how I think it may unfold:

1. Wall Street finally comes around and worships the ground that Tim Cook walks on like Amazon's (NASDAQ:AMZN) Jeff Bezos, SalesForce.com's (NYSE:CRM) Marc Benioff or Netflix's (NASDAQ:NFLX) Reed Hastings. Tim is able to sell the pipe dream of sacrificing margins and profitability for the massive global potential (fill in your choice of snake oil). Apple thus, will trade in multiples that are in line with these high fliers as Apple is now widely believed to be a "class in its own". Analysts will now argue that Apple's sum of its parts (iCloud, iTunes, iWhatever) is worth way more than the whole and hence, deserves a fat juicy multiple.

Click to enlarge

Click to enlarge

Apple now trades at least at 50x FPE and is considered "cheap" as the multiple only matches its historic growth rates. Tim announces a 10:1 split twice and the shares continues to zoom past $350. Just like no one cares that a bottled water is more expensive per liter than premium gasoline, no one whines about Apple's margins anymore.

2. It has been 2 years since I became a long term Apple bear because I thought Apple would only be "good" without Steve. I thought I knew better by holding out and I'm slowly kicking my behind for missing the gravy train. I didn't realize that the show had to go on and Steve knew better when he picked Tim to lead Apple before he passed away. Now, I'm throwing caution into the wind and I'm buying Apple shares after taking a mortgage on my house! I've decided I should join the party now that Doug Kass, Erin (CNN?) and Zabinsky are now convinced Apple is for real! No one frets about when to sell Apple anymore.

3. The media is now obsessed with finding the next Apple "millionaire". Forget another reality show featuring the attention seeking money hungry manipulative family aka the Kardashians; the "Real lives of Apple millionaires" will be the rage. My hairstylist is now giving me options advice on how to trade Apple during earnings season. He will sell his business and will be running a hedge fund after he finishes his PhD.

Remember this chart I shared with you?

Click to enlarge

Just like it was during the dot.com era, Apple's tide will lift all the ugly boats (remember the multiples assigned to JDS Uniphase (JDSU) or Corning (NYSE:GLW) during the dot.com era?). It wouldn't matter what stock you bought; as long as it was related to Apple , you would make money. Of course, this false sense of success only leads you to increase your margins...we all know what happens when it turns ugly.

4. Remember when Jobs said "It is more fun to be a pirate than join the Navy?"; well, almost every Apple employee now prefer to join the Navy instead! The majority of Apple employees have now become comfortable, arrogant, and indifferent. The company stops disrupting itself (remember RIMM dismissing MP3 players within a cellphone? or the Walkman's slow death due to MP3s?). Consumers are now slowly starting to vote with their feet just like they did against Nokia (NYSE:NOK), Research in Motion , Sony (NYSE:SNE) or Motorola (NYSE:MMI).

5. The enemy within; Apple is forgetting to "Stay hungry and Stay foolish". Key Apple management are now plotting against one another in search of power, wealth and control. Each profitable departments are now building silos and are more interested in building its own empires instead of contributing to the common good. Apple hires hundreds of silver tongued consultants with fancy designations so they can tell the company what time it is with Apple's own watch. The company becomes like a dog chasing its own tail. The company fails to keep and attract idealistic, creative and smart employees as the snakes in suits keep watch at the gates to protect their own interests.

6. The Barbarians at the Gate. You think the Mike Daisey (the one who said that it is OK to lie because he was so passionate about his work that it needed to be heard) and the NY Times expose on Apples' Chinese factories were an "accident"? Being great at what you do will almost always attract envy (no different from your boss taking credit for your brilliant work and not blinking an ethical eye for a minute). The assault on Apple will continue from all angles (yup, we should bitch about corporate taxes too!). Remember when Microsoft (NASDAQ:MSFT) had to contend with the DOJ?

7. The products and services "just don't work" anymore. The company is in danger of missing their own estimates. Therefore, it has now resorted to financial engineering to meet or beat earnings estimates. The company now resorts to consumer surveys and feedback as to what their product should do or look like while another company is disrupting its turf. Ive and Forstall had a falling out; it reminds us of what it was like when the Beatles disbanded.

8. Tim Cook resigns. Remember when Tim said...

"There's no better thrill than to look out at an audience and see people using iPhones, or go to the gym and see people using iPods, or go to Starbucks and seeing people use the iPad. These are the things that bring a smile to my face, and there is no replacement, or no substitute, for that."

Apparently, the thrill is now gone given that he is now a multi billionaire. Apple is now hiring from the outside - Mike Lazaridis has been chosen to lead Apple !

Before I could write the next few ideas down, I felt a wet lick on my nose. I woke up staring at my daughters' Yorkie. All these thoughts must just have been a bad dream! However, it is not a dream that net of cash, Apple continues to be extremely attractive.

My "closing the loop on my Apple thesis" does not mean I'm not bullish on Apple anymore or that I've sold all my holdings. I just think that there are too many Apple articles these days and it is difficult for anyone to figure out which one truly provides any value. I'm sure the SA editors will be happy not having to put up with my crazy thoughts!

Given that my intention to write about Apple has always been about keeping you in the game and never been about attracting eyeballs, it is time for me to move on as I think I've kept my end of the bargain. I think, together, we have also debunked a few myths along the way. They were:

  • "The Law of Large Numbers" as it applies to Apple . Ignore any of these types of articles. It is pure ignorance and a result of being willfully ignorant.
  • You need a lot of money to make money in Apple . $10K in LEAPs can get you started.
  • Funds are "over invested" in Apple; no more money to push it higher. Really?
  • You definitely need someone with an MBA or PhD to tell you what to do with your money. I should teach a class in Purdue attended only by a few of my friends...maybe it will become a YouTube sensation.

I do want to thank the following SA authors or independent bloggers for publishing Apple articles that I did enjoy reading when I first started. They are (not in any ranked order):

  • Travis Lewis
  • Horace Dediu - you won't find a better free site presenting the numbers in visual format than this.
  • Daniel Tello - He lets his numbers do his talking.

If you have never read any of my Apple articles before (don't forget my instablogs here), allow me to suggest the following to provide you with a perspective on my thought process:

Good luck to all Apple bulls! Live long and prosper; share some of your wealth in some random act of kindness like giving your old iPad or iPod to someone you don't know and watch their reaction....it is priceless!

DISCLAIMER: Should I encounter a really crazy misguided Apple article; you can count on me to be all over it!

Disclosure: I am long AAPL.