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Michael Blair
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I retired as CEO of an Automotive Parts supplier, and manage an investment portfolio for myself and family. I have a BA in History from Royal Military College of Canada and an MBA from the University of Western Ontario. My first career was as a fighter pilot in the RCAF, and, following my MBA I... More
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  • Apple: The Bull Case And The Bear Case. Place Your Bets! 5 comments
    Aug 29, 2013 9:18 AM | about stocks: AAPL

    Apple's (NASDAQ:AAPL) forthcoming announcement set for September 10th has the street all buzzing. What will they announce and how will it affect the stock. Bulls, Bears and Pigs are all jostling for a position at the trough and the debate that is raging has emotions at a fever pitch.

    The Bull Case is the most fun and accordingly has the most devotees. It is based on a few simple assumptions:

    1. Apple will amaze everyone with a new iPhone that has new and exciting features such as:
    2. Different colors;
    3. Different materials for the case, possibly plastic;
    4. A fingerprint reader;
    5. A wallet application for credit cards and other electronic payments;
    6. A larger screen;
    7. Higher resolution display;
    8. Longer battery life;
    9. New icons and background; and,
    10. A lower priced model with a few features left out - e.g. Siri
    11. China Mobile (NYSE:CHL) will cut a deal with Apple that is favourable to Apple and immediately start to buy millions of phones from Apple, perhaps as many as 15 million to 17 million.
    12. Docomo in Japan will cut a deal with Apple that is favourable to Apple and immediately start to buy a few million phones from Apple, perhaps adding 3 million to 5 million new users.
    13. Competitors will stand in awe, jaws sagging, gasping at the innovation and forced to slink quietly into the night, cowed by the mighty Apple's incredible genius for innovation.

    The Bear Case is less fun. It is based on all of the above assumptions except number 4 but does not believe any of them or all of them collectively form a "breakthrough innovation" worth waiting in a long line up overnight to be among the first to buy one. It recognizes that Apple will sell a lot more phones but will do so at lower margins including a very pop0ular lower-priced phone which it expect to sell for an average wholesale price of $350 per unit at 40% margin, cannibalizing the much more profitable $600 phones Apple has been selling at margins closer to 60%.

    The Bear Case further assumes that competitors may enjoy some successes. For example:

    1. Nokia (NYSE:NOK) may continue its rapid pace of introduction of new phones including innovations such as wireless charging, 41 megapixel cameras, and so on. Recent reports suggest Nokia has at least 7 new products to be introduced in the coming weeks.
    2. Samsung (SSLNF.PK) will continue to introduce creative new products like the ones announced July 20, 2013 which included not only a handful of new Galaxy smartphones including the S4 Zoom and The S4 Active but also an LTE connected camera; new tablets such as the ATIV Q and The ATIV Tab 3; and a Galaxy S4 mini.
    3. Lenovo (OTCPK:LNVGY) will continue to introduce innovative new products like its Intel powered K900 smart phone recently introduced and turning heads in China.
    4. Huawei will continue to introduce innovative new products like the recently launched 6.1 inch Ascend Mate .
    5. ZTE (ZTPOF.PK) will continue its 70% plus rate of growth with innovative new products such as its Grand Memo, Grand S, N986 and U988s for the high-end market.
    6. BlackBerry (NASDAQ:BBRY) will follow its recently introduced Q5 model with the larger screen A10 expected this fall.
    7. Motorola will continue to introduce new and innovative smart phones like the recently launched Moto X.
    8. Sony (NYSE:SNE) will introduce new and innovative smart phones like the latest Xperia model soon to be released.
    9. HTC (OTC:HTCCY) will continue to introduce new and innovative smart phones like its Butterfly and Desire models announced in July.
    10. Hewlett Packard (NYSE:HPQ) is rumored to be planning to launch a new smart phone this year.
    11. New smart phone operating systems are likely to enter the market. Some will have a measure of success.

    This is not an exhaustive list. I present it just to remind investors that this is a competitive market place and that innovation is not the exclusive domain of Apple. There is no doubt that Apple has a strong presence in smart phones and tablets, but investors should shake off the notion that it continues to be the dominant player. With its market share at 13% last quarter and likely to decline further it is no longer the force it was a few short quarters ago and in my view may never be again.

    I am long BlackBerry call options and have a hedged short position in Apple calls.

    Disclosure: I am long BBRY. 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: I have a hedged short position in Apple calls.

    Stocks: AAPL
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Comments (5)
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  • Tom Shaughnessy
    , contributor
    Comments (1144) | Send Message
    Hey Michael,


    Are you expecting the new iPhone to be as innovative as many are expecting with features that have likely not been leaked? (hard to believe since most features are already known beforehand to some degree)


    Some unknown features could be 4G LTE-A for example, but that wouldn't be as competitive in nature since the whole industry would start offering it.


    Thanks for the great read,
    29 Aug 2013, 01:20 PM Reply Like
  • Michael Blair
    , contributor
    Comments (5100) | Send Message
    Author’s reply » Tom


    I expect the new products to be more of the same, and the stock to sell off after an initial pop. Apple is playing catch up ball. I liked your article on 4G LTE-Advanced. It will be the industry standard soon enough. Viritnex may be the play.
    29 Aug 2013, 02:00 PM Reply Like
  • Sirvasq
    , contributor
    Comments (331) | Send Message
    VHC is a patent troll: uninvestable. Went from 5-30, down to $20, and headed lower. You really want to bet on judges and courts of appeal, or worse lawyers and legislation? So are the other "competitors," uninvestible: each lost and persistently lose the hardware ground they ceded to $AAPL. **Caveat on ZTE and Huawei, but you really want to invest in the China government? Not one word in the bull case about the 30% QonQ consistent growth of Itunes/content/service. The Bull case is that $AAPL becomes $AMZN minus the 2% profit margin. $AMZN cannot make products anyone likes, and can't make money except for service fees. Have you been watching AppleTV updates? Chromecast is a joke. When the market realizes $aapl will get most of its revenue thru services fees and digital goods, that will lead to margin expansion.
    29 Aug 2013, 04:59 PM Reply Like
  • Michael Blair
    , contributor
    Comments (5100) | Send Message
    Author’s reply » @Sirvasq - "each lost and persistently lose the hardware ground they ceded to $AAPL" No disrespect, but Apple's share is falling quickly and both Huawei and ZTE are taking share with growth rates over 70%. Good point on the download revenue. I note that Google Play is now larger than iTunes and growing faster. But long term I do think service fees and digital goods will be strong for Apple, devices not so much.
    29 Aug 2013, 06:03 PM Reply Like
  • rsiroka
    , contributor
    Comments (7) | Send Message
    Michael, thanks for your clear thinking,openness and good writing. You mentioned Nokia ,I am long. Any thoughts.
    3 Jan 2014, 10:23 AM Reply Like
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