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Robert McDonald
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FROM INSIDE SILICON VALLEY: Sorting the truth or likely truth from the noise is a key attribute of the successful investor. My commentary is a distillation of some of this effort relative to particular stocks and investment areas. My publishing at this point in time is limited to the blogsphere,... More
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  • Is The Market Right? Is Apple Going Down In Flames?

    The market is "right" when it comes time to buy or sell shares. Any other time it is an indicator of all kinds of things. Valuations on a company like Apple used to be tied to business and financial fundamentals but that has all changed. Apple pricing is now a function of the news or rumor of the day. Since Apple has not announced a new product or cash dividend or how it is doing in the market place for a long time, the valuation is currently tied more to rumor than anything else. Someday fundamentals like the fact that Apple dominates mobile device and PC profits will re-emerge as one of many much more important business factors. This will happen in the second half of this year with new product introductions. In the meantime all bets are off.

    Many seem to think that Apple will be a flash in the pan like Nokia or Blackberry and this shows up in commentary and stock market valuation. I don't agree. That is comparing oranges to apples, pun intended

    The immediate problem is that we have, by comparison to last year's blowout quarters, lousy April and July quarterly earnings reports to go through. Apple is also in product transition mode where things always slow down big time as people start waiting to buy the new product or old products at reduced prices. After that it will be uphill again.

    Apple has a much broader product line and an ecosystem that makes highly synergistic use of all its products. It also contributes to strong customer lock-in when they go to buy new mobile phones and other mobile web devices. And more importantly, they know how to build high quality (read Gucci), highly reliable and bug free products. The fact that they are malware resistant and low maintenance, certainly as compared to Microsoft and Google products, is not being lost on the enterprise community.

    Google is damn good in everything they do including innovation but Android has many problems. Not the least of which is vulnerability to malware and the front page hijacking that Facebook has just successfully completed. Control of this and some subsequent pages is key to Google's mobile advertising dollars and you have to believe they will respond. However options are limited and these could jeopardize Android overall. The Chinese government, owner of the largest by far mobile phone company in the world, China Mobile, does not like to have Google via its Android mobile operating system on the loose in China either; and has publicaly said so.

    Samsung is also doing its own Android hijacking in the form of making it more secure for Enterprise usage. I don't think however that many in the enterprise want Samsung solutions. They are a known pirate of all kinds of things and have little to no ethics. Folks who worked in the semiconductor equipment business saw that in spades but could do nothing about it.

    Apple also has opportunity to branch out and get huge benefits from its brand name and Apple stores. For example this includes living room entertainment and gaming centers ("Apple TV"), the iWatch, automotive intelligence via smart user friendly dashboards (in process now at BMW, Honda and others) and mobile payment systems replacing credit cards. I am sure you will see an Apple logo on some dashboards in the future but not Samsung's or Microsoft's' for both image and quality reasons.

    Then there are the enterprise and education markets which are in their infancy and largely ignored by analysts. The retail operation is the envy of the world and generates by far the highest revenue per square foot as compared to any other retail store.

    Samsung was able to copy cat its way into becoming a major competitor but I think this has gone about as far as it can go. And there are legal challenges which are likely to stick at some point. The CEO of Samsung has just given marching orders, in the form of a mantra, that the company needs to be prepared to diversify and everyone needs to get working on that.

    Their new S4 mobile phone going on sale next month is showing signs that they have hit the wall. Also Apple is pulling its huge chip manufacturing requirements out of Samsung. This not only hurts Samsung's semiconductor division revenue big time, it means they will no longer get early insight into Apple's next feature sets and innovations. By manufacturing Apple's cutting edge microprocessors they have been able to equal or beat Apple to market (more commonly called end running). The bigger threat will come from China, especially Lenovo and possible one or two other budding Chinese mobile device makers that are emerging out of the exploding low end market.

    If you have doubts about my comments on Samsung's ethics, go to this link for a good example of the problem:

    Tim Cook is no Steve Jobs but he is not the fool he is being made out to be. The collective management that SJ has left behind exceeds anything that is present in the competition by a long way. Apple is a master at innovation and manufacturing, an unequaled combination.

    Apple will never own the low end of any market nor do they do intend to. They will however come down more into the middle range with a lower cost iPhone designed and built for that purpose just as they did in the iPod market they still dominate. They are no fools and increasing overall sales and earnings at some expense to their very high margins is the right thing to do. That is as long as they do not compromise their image.

    It should be noted that Apple is already successfully selling two midrange phones. Verizon customers made that point last quarter. These phones are called the iPhone 4 and the iPhone 4S. Yes the lower cost phone sales reduce margins, however overall revenue and earnings gain and as a consequence there will also be significant numbers of users added to their sticky ecosystem.

    Something many also don't understand because of an excessive US focus, is the fact is that the high end mobile device market is growing by leaps and bounds internationally. The market is far from saturated as some would have you believe. The middle and upper classes in both China and India and in other countries, ignoring Europe, are growing at rapid rates. Apple has expanded its market place by over 80 countires. And must have new features like point of sale noncontact payment and fingerprint ID will be a huge drivers for new product sales and upgrade replacements going forward in time.

    Disclosure: I am long AAPL.

    Apr 20 2:16 PM | Link | 4 Comments

    Apple's has been silent on how they are doing in the marketplace and new product status since the January earnings report. They have also been silent on any dividend increase or buyback increase with the exception of statements that cash management is very important and that they are studying the matter. This has done nothing but magnify the worry that investors may have and fuel the naysayer's with even more gasoline.

    And by the way, they tell us not pay attention to supply chain rumors, some of which have gone unanswered clear back to early fall. Well any investor who does proper due diligence is going to try to glean what they can from available information and is going to be looking to Apple for balance. Well balance points have been few and far between. We are talking months with unaddressed questions about the impact of all the new competition, alternative phone products, and cancelled or reduced supply chain orders. Now everyone is waiting on the edge of their chairs for a possible dividend hike and additional buyback in March because it happened last year at this time (March 19th). But this is simple act of faith and disappointment may take another chunk out of valuation.

    Well the media and the analysts are going to speculate and do various kinds of second guessing no matter what warning you give them about the complexity of the supply chain and so forth... and in the absence of positive contrary information from Apple, they are having a field day peddling sensational information that increases readership or ratings ala CNBC. Therefore we have the negative fire hose of information we all have been living with for more months than I care to count.

    Alternatively, other companies use shareholder meetings and events like the Goldman Sachs conference as a chance to communicate at least something on these matters. Just because Apple has never done this before does not mean it is not important to do so now. They are mouthing the words that the stock price is very important to everyone at Apple including top management and the BOD but yet they do nothing to quell the negative firehouse of information we are all bombarded with everyday. I think the time to break the silence is long overdue and not to do otherwise is a violation of fiduciary responsibility to shareholders. And does indeed make Apple management look inexperienced and weak, whether it is justified or not.

    As a result, Apple is having a significant shareholder exodus as evidenced by the falling share price. Some of these investors may not ever come back. "Burn me once but you will never get to burn me twice" may be the appropriate motto for this action.

    I call this a management and BOD failure that is of significant concern. It is time for folks in charge at Apple to call an end to this silence and take some action to retrieve Apple's image ownership back from the media and various pundits. There are many appropriate ways to do this without giving away secrets that may give others a competitive edge, in fact quite the contrary.

    Samsung must be laughing all the way to the bank.

    Needless to say I am one unhappy shareholder at this point in time. I am still holding due to my own beliefs in the soundness of management, Apple core competence and competitive position and some positive news here and there. But not because of reassurance from management, the silence is deafening. There hasn't been anything of real substance, just management posturing and nebulous statements. This feedback is not satisfying to a serious investor.

    Let's hope Apple takes back the talking rock soon.

    Disclosure: I am long AAPL.

    Mar 05 10:47 AM | Link | 1 Comment

    Apple is a bargain value stock by any measure: PE, dividend, buybacks, established competitive positions in multiple businesses, etc.

    The bad news is out which primarily consists of Samsung's presence now as a major competitor. There are many catalysts which could return this stock to growth status in the eyes of a majority of investors. These factors range from announcements of Apple's rapidly growing enterprise business, to many new product opportunities, to China Mobile, to new business areas (automotive, TV). I would submit that another major catalyst will hit soon, the overall recognition that Apple's position in the marketplace will continue to allow it continue to capture a large fraction of mobile device profits, a growing area that has room for multiple competitors.

    Overall, Apple stock is a bargain by any measure if you look beyond the negative information fire hose that is running full bore right now.

    Disclosure: I am long AAPL.

    Feb 02 1:16 PM | Link | Comment!
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