Jonathan Wagner's  Instablog

Jonathan Wagner
Send Message
Coder, with a passion for the stock market. I Have been interested in the stock market since I was 12 and I have dabbled in experimental technical analysis methods such as non-time correlated fractal market analysis. I am the creator of the #1 drawing on maps application the web called... More
  • Why Apple Makes Me Nervous 2 comments
    Dec 18, 2012 4:12 PM | about stocks: AAPL

    When I bought my first iPad it was after refunding my net book because I had a practical reason for it. Since the iPad was gaining so much traction it would only make sense for me to learn how to develop for it. I soon found myself using it an exceptionally large amount of time, more then I would of expected. Despite all the jokes and parody that went into the iPad just being an oversized iPod Touch, Steve Jobs again created a completely new space in digital hardware. So it might seem odd that having positive experiences with Apple (NASDAQ:AAPL) products that I would be skeptical of Apple's future, but I believe there are some good reasons to be skeptical. In this article I will talk about what would make me bullish about Apple and what series of events would make me bearish.

    The Jobs Concern
    Ever since Steve Jobs's passing there have been questions about thefuture of Apple. You have critics arguing that Apple isn't open, or that Apple is better designed, and Apple is over priced. However, investors should ignore almost all of that because the market decides who is right about all of those issues. The concern for Apple investors should revolve around management and how they will manage the brand, their most valuable asset, and how they will maintain an aura of innovation.

    It's All in The Design
    In Steve Job's biography it outlined how Jobs realized computers should look more like kitchen appliances than industrial machines. He recognized that rounded corners were used every where and applied it both the hardware and software. Apple constantly pushed the envelope when it came to design. When the original iMac came it out, it was considered awesome, but they soon realized that the design was getting dated and continually updated it until we ultimately got the sleek aluminum and glass design we have today.

    Apple will soon have a design problem, if it hasn't already started, with their iOS. The Apple iOS is becoming quaint, and this is a serious issue. Simply put, people get bored. With most phone providers offering phone upgrades every 2-4 years this gives users ample opportunity to try something "new" and if the Apple iOS doesn't get a face lift, this could potentially affect their retention rates.

    If Apple changes their iOS design for the better, this would make me bullish. If they leave it the same, or heaven forbid, make it worse this would make me bearish.

    Apple Products vs Steve Job's Products
    Can Apple deliver innovative products without Jobs? I don't know, because I haven't seen a new Apple product yet. The only Apple product I have seen is the iPad mini which wasn't so much an innovation as a trend following copy cat, though the commercials will say differently. Their other major new innovation was Maps, that on top of all the problems it had, brought nothing truly innovative to the table. Apple Maps was simply a product designed to fulfill Steve Jobs's "Themornuclear War" on Google (NASDAQ:GOOG), and it failed.

    Jobs left the company with a very strong product line but it's anyone's guess if regular, some what minor, revisions to it will sustain the company into the future. Will Apple be able to release another cash cow product like the iPhone with out Jobs? I am not sure, but what I am paying close attention to is if, or when, they release products that fall outside of the product line Jobs left with them.

    Apple's Horsemen
    If Apple continues to grow it is based on one thing: innovation. If management can continue to push innovation this will allow Apple to continue to maintain its throne as one of the biggest technology companies in the world. However, if it can't, there are a couple of things that should be watched for that could signal end of days for Apple:

    1. Management Proves Incompetence
    A series of events, supported by a strong push down in the market, proves management has lost its capability. Management has already made some foolish mistakes such as the green tech certification rejection and reversal.

    2. Apple loses a lot on an "innovative" product
    This will be a very strong indicator that Apple is on the decline. However this innovative product needs to make a huge dent not only in their reputation, but also their wallet. While Apple Maps might be considered by some to be a flop, I don't believe it has the necessary financial implications to fulfill this second horseman.

    3. Management makes a business model Shift to try and recoup losses
    Shifting to an innovative business model could actually save them, if they got to this point, but what would be disastrous is if they tried to emulate someone else's model. For instance if Apple tried to switch to an operating system licensing business model similar to Google's or Microsoft's.

    Final Fallout
    Once the above three occur this will be followed by a series of predictable events. They will start losing significant amounts of money and start burning through their reserve. In order to stop the blood loss this will be followed by progressively larger lay offs. Meanwhile they will be preaching about this next great thing that will change everything.

    Finally, the biggest mistake of all: Management, in order to try and become profitable and make the share holders happy, will make a series of very bad investment decisions in stocks or otherwise which will result in significant losses. They might also move their large amount of money around in order to try and avoid losses by inflation, this will result in more losses when the economy goes through a natural recession putting a further weight on them.

    70% of Apple's revenue comes from iPhone, a market they have beenlosing to Android, some of their other revenue streams are directly linked with this mobile infrastructure. This, of course, could be all wrong. I am not a psychic. They could continue to release innovative products. This was Jobs's dream for Apple after all. Also, keep in mind that if these things happen there is no solid time frame for them. It could be 5 years or 20 years. If Apple diversifies into other industries it is even more unlikely they will go away. That said, we should always be on the look out for history repeating itself because if we see the below image again, there will be no Steve Jobs safety net.

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: AAPL
Back To Jonathan Wagner's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • XRTrader
    , contributor
    Comments (734) | Send Message
    Interesting article. However, I think that part of your thesis (AAPL needs constant innovation) is incorrect. They have a strong product offering, and a good product cycle. People will upgrade Phones and Tablets the way they did computers for the past 20 years. The only difference is that a SmartPhone lifecycle is 18-24 months, while a computer has a 48-60 month product cycle.


    On top of that, AAPL has significant recurring revenue (11+ billion next year) from sales of content (movies, books, tunes).


    When you add these two together, AAPL has a possible 10 year period of very solid FCF. With this their cash stockpile will continue to grow (even if not as fast as now). Ultimately, I think the biggest issue for AAPL will be how they deploy this current 130 billion and eventual 250 billion cash pile.


    If they use it wisely, to create value even at 10-15% per year - that would add at least 13-25 billion. When cash piles get so large, operations begin to take a back seat to capital deployment. Or, they can commit to buying back 3% of the stock float annually (15 billion). This would provide annual EPS boosts regardless of underlying business.
    20 Dec 2012, 01:47 PM Reply Like
  • Jonathan Wagner
    , contributor
    Comments (471) | Send Message
    Author’s reply » Well there is another reason that Apple makes me nervous, at what point will investors decide to cash in? It doesn't matter if a company makes positive earnings, a stock never has infinite upside potential.


    Though for a tech stock a 4x price to book isn't that bad. You're right, they are sitting on a ton of cash, it would take a lot, and I mean a lot to mess that up. They could probably roll out the worst tech product in the world and pull through, but what would take them down is the hit to their brand.


    I didn't go into it but there is another small issue I see that might not even matter anymore. Declining religosity. What I mean by that is Apple has almost taken a do not wrong stance whenever they have messed up, but they responded to it in a religious way, death grip for example. With maps, that gleam got hit significantly.
    20 Dec 2012, 02:06 PM Reply Like
Full index of posts »
Latest Followers


More »

Latest Comments

Most Commented
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.