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Yosef Levenstein
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  • Why Apple Is Down From $700 27 comments
    Oct 24, 2012 8:15 AM | about stocks: AAPL

    After a recent Stocktalk posted by Seeking Alpha founder David Jackson, I decided to put my thoughts down on paper and share my thinking related to Apple (NASDAQ:AAPL) on my Instablog.

    I've been following AAPL closely for 10 years now. I started back in 2002 as I was intrigued by Steve Jobs presentations and ideas. In 2004 I took the plunge with my first Apple product (white iPod shuffle) and it was great.

    Since that time I've been a quiet bull on AAPL and enjoyed watching the company grow and exceed everyone's expectations. So why is AAPL down recently?

    For starters, if you look at the products released since SJ passed away you can see a change in the product development process. Obviously SJ didn't do everything from A to Z but he drove the company in the direction it needed to succeed. Tim Cook does not have the passion or brilliance to accomplish that. One of the first things SJ did upon his return to AAPL was eliminating the numerous product lines and focusing on fewer products that were all great. Since he's passed it seems like new product lines keep on coming out (MBP with retina, iPad mini etc.).

    When the MBP with Retina came out I said to myself, SJ would never have approved of this. The product was overpriced, overcomplicated, and the only thing SJ probably would love is the fact that it did not have an optical drive. Then came the iPhone 5, which in my opinion was an abomination of the iPhone. They changed its form factor from what was the perfect shape and size, destroyed the user experience for legacy users, and released an inferior product. Yes it's flying off the shelves, but that's momentum which can't last in the face of an inferior product development process.

    Now comes the mini-iPad and revised New New iPad. SJ said 7" tablets are dead on arrival back in 2010, and yet now they released one. Additionally, I've used the Nexus 7 and it's great. Yet now Apple comes out and says everyone missed the boat on the 7" tablet and we got it right. But that is incorrect, the Nexus 7 nails the 7" tablet UE and is only 199.

    The argument against android is substantial, and justified. Different pieces of hardware, non optimized, creates a messy environment. But if you zoom in on the product Google endorses you will find a different experience. The Nexus 7 is truly an amazing user experience, Google is now partnering with Samsung on a 10" tablet that will blow iPad away in tech specs, and let's not forget a small entity called MMI that Google now owns that is working in the background on what is most likely a Nexus smartphone. Of course we can't ignore the Chromebook (Macbook air priced at 249!).

    So why is AAPL down? For starters my belief is the current share price is based a forward looking expectation of continued YOY revenue growth of 50%. On the most simple of levels if that is not sustained the current share price is not justified. AAPL has a PE of around 14, that is on par with similar companies in its class, but the question in my mind is if PE remains at 14 but YOY growth is let's say 10%, what would AAPL trade at? I also think that people that follow AAPL objectively may be able to recognize the change in the company and may realize that while it's been a great run the stock price just can't keep on running up, and as such may be capturing profits now. By the way that isn't to take away from the fact that AAPL is still up 51% YTD.

    As a sidenote (a BIG sidenote). Apple currently controls a major share of the tablet market but Google has Apple in its sights. Larry Page has been cutting back on a number Google products and focusing on making a few products great (sound familiar?) additionally they are focusing on optimizing hardware and software for each other (hmmmmm). Apple may like to believe the 7" tablet has been a failure until now, but that just isn't true. Google nailed it with the nexus 7, and they are developing their own ecosphere that is guaranteed to give Apple a run for its money.

    My father always says you either predict a price or time, but never both. So I believe AAPL will probably get to around $500 per share before leveling out. At that level investors will evaluate the value of the company and see if that is its fair value. The main factor I'm watching closely is their YOY revenue growth. If it starts to slide, that would be reason enough to push the stock down. When that will happen only God and SJ know.

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

    Stocks: AAPL
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Comments (27)
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  • Jehuda Saar
    , contributor
    Comments (5) | Send Message
    Playing the "Steve Jobs would not have approved of this" game is very dangerous. Chances are pretty much everything we have seen introduced this year, the man still had a hand in. The iPhone5 an inferior product ? Where do you come up with that ? The MPB retina overcomplicated ? If anything they have dramatically dumbed down the entire screen resolution choice process. And you still waste time comparing specs between iOS devices and Android. That's not what this is about. it's the ecosystem, and so long as there is no credible alternative to the Apple ecosystem out there, anyone else can produce the sleekest, fastest, most feature heavy product in existence, and it still won't sell. If you really want to understand AAPL spend some time listening to Horace Dediu on his "The Critical Path" podcast and his asymco.com blog. You'll see what I mean.
    24 Oct 2012, 08:09 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » Good point. SJ may have had a hand in the initial development of the iPhone 5, but he clearly did not approve the final product. The MBP w/retine is expensive and splits an existing product line in a way I don't think he would have approved. He would have either held out until the price was more reasonable and all the MBPs were the same or possible passed. Google is currently developing an ecosystem that may be a competitor to the current iOS ES, and microsoft already has that in place with XBL and now Windows 8.
    24 Oct 2012, 09:09 AM Reply Like
  • David Jackson
    , contributor
    Comments (1278) | Send Message
    Jehuda, methinks Steve Jobs would never have allowed a product to be named "the new iPad", knowing there would be subsequent versions, and the name would cause product confusion:


    "I have an iPad2. Which iPad do you have?"
    "I have a new iPad. The previous model."
    24 Oct 2012, 10:51 AM Reply Like
  • Jehuda Saar
    , contributor
    Comments (5) | Send Message
    Actually Apple have been using this naming convention (or lack of it) for years now. I have a MacBook Pro and a MacBook Air. Which model do I have ? My MacBook Air happens to be a 2010 Core 2 Duo model. Looks EXACTLY like the brand new core i5 or i7 ones, has the same name, and yet is a totally different animal.
    As far as introducing new tech ahead of time, that's a Steve Jobs signature move. I was using WiFi in 1999, introduced then by Apple as Airport. I'm not sure the term WiFi had even been coined yet at the time. And introducing the retina display MacBook Pros while still having the old models around is the only way to guarantee a smooth transition from a software perspective. You want people developing for that new or improved platform so that when you phase out the old tech entirely, the transition goes without a hitch and you can run all your favourite apps without skipping a beat.
    There is nothing worse than playing the "Steve Jobs would not have liked..." game. That's no way to analyze a company or product. There are sound decisions and unsound ones. Jobs made a great deal of mistakes as well (remember the PowerMac G4 Cube ?). Best to stay away from these sort of speculations in sound analysis.
    25 Oct 2012, 05:12 AM Reply Like
  • rtorcato
    , contributor
    Comments (7) | Send Message
    Where the hell do you get 50% forward looking revenue growth? Apple's growth has been ignored by wall street for years. PEG of GOOG and even MSFT are way higher than AAPL


    24 Oct 2012, 08:27 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » In recent years Apples's $AAPL revenue growth has increased 50% year over year. Assuming that the market is forward looking the stock may have priced that into it's current value. $MSFT was dead in the water until recently, and I'm quite bullish on $GOOG.
    24 Oct 2012, 09:06 AM Reply Like
  • rtorcato
    , contributor
    Comments (7) | Send Message
    Can you tell me how the market is currently pricing in 50% revenue growth with a PE of 14? That PE is not even including cash over 100b.
    24 Oct 2012, 09:22 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » That is why this is an opinion piece. My conundrum is why the P/E is 14. And if a P/E of 14 is maintained at a lower YOY growth what would the price of the stock be? If I had the answers I would not be asking these questions. My speculation is that the price is not related necessarily to the P/E or the fundamentals, but rather the market's expectations.
    24 Oct 2012, 09:42 AM Reply Like
  • Hedgephone
    , contributor
    Comments (1359) | Send Message
    Nice bearish AAPL bullish GOOG call here.... "leveling out" indeed
    7 Feb 2013, 01:57 AM Reply Like
  • PersonaNonGrata
    , contributor
    Comments (62) | Send Message
    "Then came the iPhone 5, which in my opinion was an abomination of the iPhone. They changed its form factor from what was the perfect shape and size, destroyed the user experience for legacy users, and released an inferior product."


    Whaaaaaaa? Are you thinking about the same iPhone5 I am? Yes the form factor changed, but in a completely unobtrusive way. And how was the user experience "destroyed"? My last iPhone was a 3G and when I pick up my wife's iPhone5, I intuitively know how to use it.


    What would have made the 5 superior in your opinion? You really bashed it so what would have been a better release?
    24 Oct 2012, 08:53 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » That is an excellent question. I actually emailed Tim Cook about the iPhone 5 (not expecting a response) but just to voice my concern. In my humble opinion the iPhone 4 was the optimal form factor, the only reason they stretched out the 5 was to allow for widescreen. What they should have done is figure out a way to make the iPhone 4 widescreen, maintain the current form factor, and increase battery life. They couldn't pull that off so the copped out and made the larger iPhone 5. SJ would have pushed them to figure it out in a way only he could. Do me a favor, take your wife's iPhone 5 and hold it sideways with one hand supporting it with your middle finger and thumb. Maybe, my hands are small but I felt when I did that with the iPhone 5 my fingers were stretched uncomfortably, vs. my 4s that I can hold that way very comfortably. There are other issues that everyone discusses, but what I see is a company that used to push the envelope in technology and the perfect product release, and now just rolls out products regularly. This isn't a bad thing, and it doesn't mean $AAPL is going to $0, it just means it's going to settle down and mimic $MSFT's performance in the last 10 years.
    Oh, and as a 4s user, I find that apps are now shrunken to fit my smaller screen, and they just are not as responsive as they used to be. a 7" iPad is just going to make things worse. Different sized screens, and different form factors translate into a smaller scenario similar to Android.
    24 Oct 2012, 09:13 AM Reply Like
  • PersonaNonGrata
    , contributor
    Comments (62) | Send Message
    Thanks for responding. We'll have to agree to disagree, but your ideas are good ones. How cool would a solid panel be with no discenrable bezel? Alas, if the tech isn't there yet, it's not there yet. Also, I'm 6'6" with big hands so I accept your sideways hold challenge ;-)


    I think the 7" mini will be a hit and because it's $329 we won't see it cut into tablet margins. I also don't see offering a choice in form factor as adding a new product line. It's essentially and iPad2.


    SJ said in interviews that his number one contribution to Apple was to foster an environment where inspiration comes from the ground up. I feel this is why they've been so successful. I haven't seen any evidence that this has changed.
    24 Oct 2012, 09:36 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » I agree to disagree as well.


    I loved my white iPod shuffle, I loved my iBook G4, I loved my white macbook, I loved my iMac, I loved my iPod Nano 1gb, I loved my iPod Nano with a video camera, I loved my iPhone 3G, and I loved my iPhone 4s until iOS 6. I am pretty sure I missed a few other iPods that I owned, and I haven't mentioned all the media I've downloaded from iTunes and the App store.


    I remember when I bought my iBook I bought it from an investment banker on Ebay. His wife had made him buy it and he couldn't get used to the OS. Back then when I would open it up in Starbucks or other public places people would come over and ask which Mac I was using and ask if they could see how it works. Back then all laptops were boring Dells, and my little white iBook with its glowing Apple logo was so unique. And people were amazed by the slot loading disc drive.


    Those days are no more. But my wandering tech eye is intrigued by the Chromebook, and I just can't help but wonder if Google is about to pounce Apple.
    24 Oct 2012, 09:50 AM Reply Like
  • rubicon59
    , contributor
    Comments (1497) | Send Message
    I wish I could short SA - this is an abomination of an Apple article, even by SA standards.
    25 Oct 2012, 02:18 AM Reply Like
  • Internal Source
    , contributor
    Comments (303) | Send Message
    Agreed. I don't see anything concrete here other than rhetoric that doesn't reflect what's actually happening (product sold out, lines aroud the buildings, hot black market in China for the goods, etc.) I think pirota and this guy got together on this article - where's the pirota byline? Ha.
    25 Oct 2012, 08:53 AM Reply Like
  • Regarded Solutions
    , contributor
    Comments (20339) | Send Message
    The products are simply not special. Too much overlap which of course will cannabalize existing products, and nobody really "desired" an iPad mini. Cook has not won the hearts of Appleheads, yet. Will he? He better begin doing that with their enormous fan base now, before it begins to erode.


    Apple's eco system is amazing, but right now it is fragile. In my opinion, more attention should have been placed on the rumored Apple TV, a real TV, which would have been innovative.


    Current products are just OK, for the Appleheads.


    I have also not seen much in the way of innovative marketing. They better start hitting those high notes again.
    24 Oct 2012, 09:31 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » Thanks RS.


    I agree on most of your points, but I don't think an Apple TV is the solution to its sorrows. The current generation of Smart TVs from Samsung and Co. are quite impressive (240 HZ refresh rate on an LED is the closest I've ever seen to a video appearing like real life). The issue is the lack of innovation and lack of quality in the product. SJ was able to admit when he was wrong or recognize a mistake. The current iPhone 5 production is a mess and apparently 40% of the phones that roll off the production line don't pass QC. And, apparently they are shipping scratched iPhone 5 handsets. This isn't the same old rodeo, and the stock price will adjust accordingly as people get a better grasp of the data.
    24 Oct 2012, 09:53 AM Reply Like
  • Toyman317
    , contributor
    Comments (8) | Send Message
    One thing not mentioned by anyone here is Apple's potential to capture enterprise market share. My son is an ATT employee and they are issued IPhones and IPads. Some federal and state agencies are replacing their Blackberrys with IPhones. I work for the State of Indiana and that is happening here. Goodbye Blackberry...hello Apple. I think this could be huge for Apple.
    24 Oct 2012, 10:20 AM Reply Like
  • Yosef Levenstein
    , contributor
    Comments (23) | Send Message
    Author’s reply » Could be, but I remember when $RIMM started to decline people (myself included) said they would remain significant because of the corporate users...
    24 Oct 2012, 10:59 AM Reply Like
  • Hedgephone
    , contributor
    Comments (1359) | Send Message
    ayuuuuup... been there, thought that... thanks goess to WD Gann for hammering into my brain the concept of stop loss orders, or has he would say, STOP LOSS ORDERS, lol Do you still think Apple levels out here? I like it ok here I guess, but GOOG is eating its lunch...?
    7 Feb 2013, 02:00 AM Reply Like
  • Little Apple
    , contributor
    Comments (4265) | Send Message


    Thanks for a great article! I think one reason that the price took a dive after the presentation yesterday was that it appears the new iPad mini may be made from the same material as the iPhone 5. They allude to that in the presentation, however I have not had time to investigate it. If it IS the same material -- it will scratch like the iPhone5. I was in the middle of researching that when the announcement came that Mel Karmazin was leaving Sirius -- and I switched gears and wrote an article about that. But that is my next project.


    I realized that Apple MIGHT have some problems (with Steve Jobs gone) when Cook approved the huge bonuses for himself and his top managers last year. SJ would have been violently opposed to that.


    And I do not think SJ would have allowed this production/quality problem with the iPhone 5 (and now maybe the iPad mini) to go on.
    24 Oct 2012, 11:31 AM Reply Like
  • Jorge Aura
    , contributor
    Comments (146) | Send Message
    Dear Yosef


    Thanks for the good post.
    We have to think that the market is taking off a benefits before the elections. Anyway, in Europe are growing sales of the device Samsung Galaxy and Google can play an important role with Nexus 7.
    The big problem I find with Apple is that they need to launch a star new product. The Investors of Apple might be thinking that there is a stagnation with their devices in the market.


    Best regards.


    24 Oct 2012, 12:25 PM Reply Like
  • Modernist
    , contributor
    Comments (2083) | Send Message
    I couldn't disagree more about 50% YOY revenue growth being necessary for an average P/E. There is no connection. The reason the P/E is not higher is the size of the market cap exhausting institutional capital. If the market cap was regular-sized it would have a much higher P/E to go along with the outstanding revenue growth.


    More on Larry Page, Steve Jobs, and narrowed focus: http://seekingalpha.co...
    24 Oct 2012, 03:35 PM Reply Like
  • Amir Houriani
    , contributor
    Comments (227) | Send Message
    Couldn't have said it better myself
    25 Oct 2012, 12:06 AM Reply Like
  • Amir Houriani
    , contributor
    Comments (227) | Send Message
    Dear Yosef,


    Thank you for proposing this question. I'm sorry for the extreme aggression you've experienced from your commentators.


    I believe the biggest reason for Apple's stock dropping was the unfounded expectation that Apple would make an iPad mini with a $199 price point. Investors were hoping Apple would destroy their competition on both a product and price component; however, when Apple revealed its $329 price point, investor optimism quickly turned into extreme pessimism. Like most product releases, the expectations are ludicrous and often leads to short-term bearishness.


    The other issue, and I dare say this, is Apple's lack of innovation and ingenuity in their product releases. They're revolving their business model upon incremental innovation of existing products and reaping the benefits from those sales. In the short term, Apple will remain extremely profitable and generate value for their consumers, however, the long-term perspective (5+ years) is becoming unclear. I'm still bullish with Apple in the short-term.


    With regards,
    25 Oct 2012, 03:49 PM Reply Like
  • Lanning
    , contributor
    Comments (18) | Send Message
    I have ben an Apple user/shareholder since SJ returned. I do like the new products just announced but feel that it was the presentation itself which shortchanged them. As to the AAPL price, even those who lowered the one year target did do so by much - I saw nothing serious below 790. If there is no financial crisis (wars/country defaults) APPL, IMHO, will slowly march to 700 by the year end and 800 in less than 12 months. As an aside, APPL has paid by its performance for everything I ever bought from them :)
    28 Oct 2012, 01:39 PM Reply Like
  • FReDD_37
    , contributor
    Comments (12) | Send Message
    Let me say that:
    price720....now 458??
    you need to put 458 x 1,57% = 720 again.


    So why apple go down so much?
    Easy to know?
    I think:
    1-Post election year.
    2-Max high price for stock "live"
    3-Time to be bear and run down
    4-Y/Y grow is lower.
    5-Iphone5 is good, but not amazing
    6-Imac market is going down quickly
    7-Revenue onlt 17,6% year to year (no more 50%) las year 2011-2012 was 73%!!!
    8-Us market growing, china more, but all rest slow 2-10%
    9-More sells about only 3 products:
    Iphone 56,2% in 2011 Q1 only 38,3%
    Ipad 19,6
    Imac 10,1
    =85,9% revenue from there.
    In Q1 2011: only 74,9% come from that 3 products.


    Well i see a realistic price for AAPL in 500 in short term like 1 month and 550-600 in 3 month (before earnings).
    Earnings 2013 Q2 say....WHERE WE GO...down to 400 or up to 600.
    Apple NEED China Mobile deal, they got a lot of market share of smartphones of China country. In Usa only grow 9%. If Tim Cook dont make the deal....Apple share market in world of smarthones continue growing SLOW and rivals taking advantage in the long term.
    Apple NEED new iphone low cost with other brand, never use the same!!!
    Apple NEED to make little big screen like samsung and continue sell both models. Colours (they going to make it for iphone 5 in june/july)
    Apple NEED to make the I-TV concept, to re-enter in the highway market grow for TV. (Imac going down fast, like ipod do in the past)
    6 Feb 2013, 04:48 AM Reply Like
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