This article is from two years ago, Bastion. Many things have changed since and I have written on those changes. It's completely disingenuous to suggest this represents current thinking. The question is whether the core argument holds i.e. that Apple's go it alone approach will cause them to lose market share. That's really the only thing this article is about. It's not about margins, it's not about valuation and it's definitely not about Flash.
Moreover, you do point to two areas that I never even touched on in the article (margins and Flash). If you would re-read this, you would see that the Flash reference is a blockquote and you will also see no reference to margins.
You'll need to come up with something more robust as a rebuttal. Take a look at Dialectal Materialist's comments. I think he makes good points below.
Thanks for the reply, Dialectical. It was a thoughtful response. The place where I would take issue with your analysis is where you indicate that "Apple's "closed system" is precisely what will protect it in the post PC era."
My view is that the technology ecosystem we are moving into is inherently open because of mobile. The portability of data across platforms and devices is going to INcrease over time and not Decrease (think of contact lists, music in the cloud, PDFs on Google Apps, social networking apps, mobile game apps, etc ). I think switching costs will diminish and this will make economies of scale and network effects more important in utilizing the switching costs that do remain.
I agree with you however that calling a top for a momentum stock is a losing battle. The question has to be the fundamentals.
If one does a DCF on Apple, it's clear that there are three effects that predominate: market share, growth, and margins. And all of these effects depend not just on near-term variability but medium term maintenance.
What I don't say in this article since it is not geared to valuation but would now given Apple's share price is that Apple will need to maintain all three (share, mobile market growth, and margins) over the medium-term in order to be a good long-term play. The crux of my analysis here that holds up is that the share aspect has become threatened. In later articles, I also pointed to the margin compression theme we are discussing here. In my view, those are critical components to maintaining valuation for Apple. The erosion in one has already begun (share). This has been offset by the tablet market of course. I am predicting an erosion in the second (margins). Again, let's look at this come October.
Dialectical, we should always revisit any conclusions we make that underpin our investments every six months or so to see if the basic logic holds up. I have done so again and again and the logic has held. The question for an Apple shareholder has been: why should we sell then? And to date the answer is: there is no reason to do so yet. I don't think you can make that statement as easily now. For me, it was in seeing the component prices of the iPad 3 that did it. It told me, margin compression was happening and that now would be the time to monitor sales growth.
From a pure momentum perspective, I mentioned a couple of weeks ago that the stock looks tired. But so what if the fundamentals are good? The problem has to be margins and growth. And I would be looking at these closely, especially in the tablet space.
We seem to be already seeing the share price erosion I mentioned would happen this year. Let's see how this plays out though.
My point in this comment that Apple was way overbought and recent indications were that margins were being compressed on the iPad 3. I expect this to weigh on the stock by the end of the year.
My point on this post is till the same and it had nothing to do with the share price: Apple's market share will erode because it is one 'closed' competitor competing against an army of Android 'clones'. It is irrelevant whether HTC makes money as it was irrelevant whether Packard Bell made money in the Clone Wars in the 1990s. The key is distribution and network effects of platform adoption. That speaks well for Android and will negatively impact margins at Apple.
Once growth does slow this will erode growth and the shares will be impacted. I believe 2012 is when this will occur.
I stand by everything here. Nowhere did I predict Apple earnings or share price eroding. In fact I wrote this.
Here’s how I see it shaping up. Android continues to make huge inroads and developers start focusing more energy on that platform. Either Apple’s market share erodes or eventually they are forced to compete at a lower price point. None of this is a problem near-term as the growth rate is still high. But when growth in the cloud- and mobile-related computing revolution slows, Apple will be exposed. http://bit.ly/HqrxTb
We are now much closer to margin compression and share price erosion. I would say some time this year as growth rate for mobile slows we will see compression. The stock looks tired.
Credible Lenders Of Last Resort Use Price, Not Quantity Signals [View article]
Asbytec, hi. I normally don't comment on SA but you're a good commenter so I wanted to point you to how I see it.
As a central planner (note the negative connotation implied there), the Fed can explicitly target any maturity it likes for assets in its own currency as the monopoly supplier of reserves. Financial repression only works via interest rate (price) targets because the Fed is a price fixing monopolist. The same would be true for the ECB. It will achieve its goal of repressing rates not through buying up paper but signalling credibly that the policy rate will be low for an explicit period and that it stands behind specific asset classes at a specific maximum target rate or spread.
Here's a specific answer about targeting quantity over price on Operation Twist: http://bit.ly/vhDYCT
"Operation Twist can only move rates a few basis points. And since the Fed is targeting quantity not price AGAIN, it's not even clear that rates will decline. Rates are already so low that these basis points won't make ANY difference. I see this as a non-event, a big fat yawn. It’s not treason at all. It won’t even be effective."
Financing World Trade - Buy the U.S. Dollar [View article]
Many thanks on the kind words. Seeking Alpha is going to be posting three articles a week from me now. Go to Credit Writedowns for other articles and analysts I listen to. Cheers.
Technology's Paradigm Shift: Which Companies Will Dominate? [View article]
Good comment on Microsoft and IBM. But Ballmer doesn't seem to get it. I think Microsoft needs fresh blood that understands what you are saying. It wasn't until Gerstner came to IBM that they made the strategic moves to exit PCs and focus on IT services.
If you look at the data, you'll see that the household sector is nowhere near the debt to income levels of the pre-1980s bull market phase, let alone WWII.
Denis, I should point out that my market view hasn't changed that much. I have been positive on stocks since March 2009 (cautiously so since October 2009, but a bit more positive since about September 2010)
banks are going to earn a lot of money and that is bullish for their shares – at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
As I said in another post in October 2009 when i was a bit less positive:
all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession…
From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
How Apple Keeps Screwing It Up [View article]
Moreover, you do point to two areas that I never even touched on in the article (margins and Flash). If you would re-read this, you would see that the Flash reference is a blockquote and you will also see no reference to margins.
You'll need to come up with something more robust as a rebuttal. Take a look at Dialectal Materialist's comments. I think he makes good points below.
How Apple Keeps Screwing It Up [View article]
My view is that the technology ecosystem we are moving into is inherently open because of mobile. The portability of data across platforms and devices is going to INcrease over time and not Decrease (think of contact lists, music in the cloud, PDFs on Google Apps, social networking apps, mobile game apps, etc ). I think switching costs will diminish and this will make economies of scale and network effects more important in utilizing the switching costs that do remain.
I agree with you however that calling a top for a momentum stock is a losing battle. The question has to be the fundamentals.
If one does a DCF on Apple, it's clear that there are three effects that predominate: market share, growth, and margins. And all of these effects depend not just on near-term variability but medium term maintenance.
What I don't say in this article since it is not geared to valuation but would now given Apple's share price is that Apple will need to maintain all three (share, mobile market growth, and margins) over the medium-term in order to be a good long-term play. The crux of my analysis here that holds up is that the share aspect has become threatened. In later articles, I also pointed to the margin compression theme we are discussing here. In my view, those are critical components to maintaining valuation for Apple. The erosion in one has already begun (share). This has been offset by the tablet market of course. I am predicting an erosion in the second (margins). Again, let's look at this come October.
How Apple Keeps Screwing It Up [View article]
From a pure momentum perspective, I mentioned a couple of weeks ago that the stock looks tired. But so what if the fundamentals are good? The problem has to be margins and growth. And I would be looking at these closely, especially in the tablet space.
How Apple Keeps Screwing It Up [View article]
My point in this comment that Apple was way overbought and recent indications were that margins were being compressed on the iPad 3. I expect this to weigh on the stock by the end of the year.
My point on this post is till the same and it had nothing to do with the share price: Apple's market share will erode because it is one 'closed' competitor competing against an army of Android 'clones'. It is irrelevant whether HTC makes money as it was irrelevant whether Packard Bell made money in the Clone Wars in the 1990s. The key is distribution and network effects of platform adoption. That speaks well for Android and will negatively impact margins at Apple.
Once growth does slow this will erode growth and the shares will be impacted. I believe 2012 is when this will occur.
How Apple Keeps Screwing It Up [View article]
Here’s how I see it shaping up. Android continues to make huge inroads and developers start focusing more energy on that platform. Either Apple’s market share erodes or eventually they are forced to compete at a lower price point. None of this is a problem near-term as the growth rate is still high. But when growth in the cloud- and mobile-related computing revolution slows, Apple will be exposed.
http://bit.ly/HqrxTb
We are now much closer to margin compression and share price erosion. I would say some time this year as growth rate for mobile slows we will see compression. The stock looks tired.
Credible Lenders Of Last Resort Use Price, Not Quantity Signals [View article]
As a central planner (note the negative connotation implied there), the Fed can explicitly target any maturity it likes for assets in its own currency as the monopoly supplier of reserves. Financial repression only works via interest rate (price) targets because the Fed is a price fixing monopolist. The same would be true for the ECB. It will achieve its goal of repressing rates not through buying up paper but signalling credibly that the policy rate will be low for an explicit period and that it stands behind specific asset classes at a specific maximum target rate or spread.
http://bit.ly/tuX8Lu/
Here's a specific answer about targeting quantity over price on Operation Twist:
http://bit.ly/vhDYCT
"Operation Twist can only move rates a few basis points. And since the Fed is targeting quantity not price AGAIN, it's not even clear that rates will decline. Rates are already so low that these basis points won't make ANY difference. I see this as a non-event, a big fat yawn. It’s not treason at all. It won’t even be effective."
China Currency Bill Is About U.S. Politics, Not Trade [View article]
China Currency Bill Is About U.S. Politics, Not Trade [View article]
http://bit.ly/pZdSJJ
Bond Risk: Why Italy and Not Japan, Germany or the U.S.? [View article]
Financing World Trade - Buy the U.S. Dollar [View article]
Technology's Paradigm Shift: Which Companies Will Dominate? [View article]
Here's a good article on that:
www.forbes.com/2002/11...
My fear for Microsoft is that they make so much money now that they will wait too long to make the right transition.
The Flaw in Google's Business Model: Site Scrapers [View article]
Cautious Optimism for 2011 [View article]
Cautious Optimism for 2011 [View article]
See here and look at the household sector charts:
www.creditwritedowns.c...
Cautious Optimism for 2011 [View article]
See "The Fake Recovery from April 2009:
www.creditwritedowns.c...
banks are going to earn a lot of money and that is bullish for their shares – at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
As I said in another post in October 2009 when i was a bit less positive:
all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession…
From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
www.creditwritedowns.c...
Nothing I said in this post contradicts this.