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jberet
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10 years experience as a middle market private equity investor (2.1B US AUM) and institutional trader. Currently trading my own account. University of Arizona.
  • Why You Should Be Nervous If You Are Long Apple 0 comments
    Jan 24, 2013 4:51 AM

    The quarterly earnings are in, and it's not good news for Apple. Yes, Apple did report record revenue and profit, but that is not the story. The story is that Apple products are under attack and its gross margins are getting squeezed. Year over Year, gross margins are down to 38.6% from 44.7%. Additionally, Year over Year net sales of Macs and iPods are down. Why is this so significant?

    The growth story at Apple for the first time since 2006 is officially in question. The game changing innovations that fueled AAPL's market cap to its 650B September high seem very distant today. After today's after hours selloff AAPL has shaved 215B of market cap since its September high. To put this number into perspective, 215B is nearly the market cap of IBM or the GDP of the Czech Republic.

    The reason for this decline is simple, the growth story has evaporated. The innovation coming out of Cupertino in the post Jobs era is nonexistent. Sure there has been an iPad Mini (Samsung has made a 7 inch tablet for 2 years) and a new Maps app. But following the game changing innovations that disrupted and defined new industries: iPod/iTunes (Music), iPhone (Smartphone) iPad (Tablet) the rate of innovation has stalled. As the growth story at AAPL has waned, large institutional growth investors have taken notice and are rotating out of their positions.

    So what has happened? Did AAPL get stupid overnight? Of course not, every one of their core products is arguably industry leading. It's just that 1 year ago, every one of their core products was unquestionably industry leading, and by a mile. A year ago it would have seemed inconceivable to not buy an Apple product; they were just that much better than the alternative. Fast forward to today, this is just simply not the case. (Full disclosure I am device agnostic: Windows PC, iPad, Android Phone)

    AAPL Year End Revenue (in millions)

    2012

    2011

    2010

    2009

    156,508

    108,249

    65,225

    36,540

    Growth rate 44.6%

    Growth rate 66.0%

    Growth rate 78.5%

     

    The devil is in the details. AAPL is still growing, that is just a fact, but it is clear that its rate of growth is trending downward. AAPL is also a fantastic business that has industry leading products that consumer's desire. The problem is that AAPL is under siege in every single one of its' core products. Google, Microsoft, Samsung, Sony, Toshiba, HTC, LG, Acer, Asus, Lenovo, Dell, HP, Nokia et al. This is not a revelation, in the Jobs era AAPL was able to navigate and stifle any significant headwinds by simply out innovating everyone else. The main thesis for why I think AAPL has so much risk today is simple, Tim Cook is not Steve Jobs. He had BIG shoes to fill, there is no doubt. But a long bet on AAPL is a bet on Tim Cook, and it contains substantial risk. Tim Cook is an operations guy, not a visionary and today on the conference call he spoke of the halo effect (persons that buy an iPhone are more likely to buy an additional Apple product in the future). The halo effect is certainly real, I am guilty. The problem is that the halo effect works for other platforms as well, let's face it, the iPhone 5 is no longer a revolutionary piece of hardware, long time Apple loyalists have shunned the iPhone 5 for more robust hardware from Samsung, HTC, LG, Motorola and others. Add to this, Tim Cook specifically stated that the iPhone 5's 4 inch screen size is here to stay and that any rumors to a larger iPhone screen are just that, a rumor. I was a long time iPhone user and have recently switched to the Android platform, will I be more prone to buy a Android based tablet in the future? It will certainly be in the discussion.

    But AAPL sold a record 47.8M iPhone's in the latest quarter compared to 37M year over year. Also a record 22.9M iPads vs 15.4M year over year. So what is the problem? Times are good right? Maybe, but I doubt it. AAPL has some serious goodwill currently; the average consumer really has no interest in undertaking the hassle of switching platforms. Until there is a compelling reason to do so, my point is that unless AAPL shows that it is capable of innovating at the rate it has in the past, at some point the juice will no longer be worth the squeeze.

    Disclosure: I am short AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Also own AAPL Put Options

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