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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
  • Is The Market Right? Is Apple Going Down In Flames? 4 comments
    Apr 20, 2013 2:16 PM | about stocks: AAPL, MSFT, GOOG, NOK, BBRY

    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:

    http://apple-investor.com/2013/04/digitimes-is-a-samsung-shill/

    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.

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Comments (4)
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  • layinlow1956
    , contributor
    Comment (1) | Send Message
     
    Come on Bob. Nansen knew when to call it a day.
    21 Apr 2013, 10:44 AM Reply Like
  • OldWarrior
    , contributor
    Comments (2278) | Send Message
     
    I certainly hope that $AAPL does some serious diversification. I am writing this after having seen their April 23 Earnings release, and am noting the "Street's" huge yawn. $AAPL is NOT diversified ATM, they are pure Consumer Electronics. Samsung is certainly the most "Diversified" of all the serious Phone builders of course, followed (amazingly enough) by Nokia.
    Remember where Apple got it's name and Logo-Apple Records (ie The Beatles). With all of Apple's cash, they could easily buy a few builders of Electronics and, after some "up-Quality " changes, slap their Logo on them, and have some extra income streams other than the 3 "Core products" that they now are trying to bring back from Life Support.
    Seriously, the iPhone 5 is long in the tooth, the iPad is crumbling under the competition from the "Mini", and Mac Books are in the same doldrums as all the PC and Laptop sellers. At least Nokia has the "Here" Navigation system (something Apple failed so miserably at, as well as their 50% (and control of) NSN.
    Please do not misunderstand me, despite my notoriously vocal support for my Nokia Long position, I am all in favor of $GOOG and Samdung getting stopped, and Apple is in the best position to do it. That said, I am saddened that Apple is not even ready to announce new products, much less starting production. I am not foolish enough hat my beloved Nokia will be in any position to hurt either of the "Big 2" in the next few years, thus my hopes are on Apple. I would love to see Apple on a more aggressive schedule of products, as I have stated elsewhere. I would like to have seen at least the new (rumored) iOS upgrade out within the next Q, a "Mini" upgrade out before school starts, a new Phone out around T-Giving, and the "S" update of the iPhone out in like Early Summer. So I see a Retina display Mini in Late Summer, a {IMO} iPhone 6 on let's say Black Friday (with a goodly supply of product ready) an iPAD upgrade in the spring, a 6S early summer, Rinse Repeat.
    With Apple's cash on hand, a year or 2 of that would lock Apple in rather solidly, and all those Apple Car Stereos, Home Theater, Whatever, under a different department pumping out goodies year-around. Sounds like possible to me, and I have hopes that this could break Apple out of it's doldrums.
    24 Apr 2013, 04:12 AM Reply Like
  • fidgewinkle
    , contributor
    Comments (457) | Send Message
     
    You're old enough to have been around the last time Apple's proprietary computer business was crushed by the open OS. Proprietary systems are faster to be developed, but once the open system catches up on features, the proprietary system only has disadvantages. Apple's ability to command high prices, high margins and large market share all at the same time in phones & tablets is rapidly coming to a close.

     

    Apple's continued movement on this trajectory will require a completely new product like wearable computing. Apple could also do something more in home entertainment, but that is a really congested space that seems unlikely to bear fruit. The difference at this new product stage is that there isn't nearly the groundwork like there was in music players, phones and tablets. Apple might pull a rabbit out of their hat, but it doesn't seem likely that conditions exist for history to repeat again.
    24 Apr 2013, 04:56 AM Reply Like
  • OldWarrior
    , contributor
    Comments (2278) | Send Message
     
    Probably not. Apple and $BBRY are both essentially going after the same upscale end of the Smartphone Market, and there isn't room up there for everyone who wants a piece of that. $BBRY has less worldwide exposure than $AAPL, so absent some serious mistake by either Apple or Samsung, I don't hold out a lot of hope there.I just hope my Nokia can find a niche to fit into there somewhere. Long Nokia from $2,77, and still at a small profit, but well short of where I had hoped to be by now,
    24 Apr 2013, 07:27 AM Reply Like
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