Aristophanes

A Good Time to Buy Apple

Good lord Roger, you're actually quoting the same Apple blogger 10 times now! The guys with about as much credibility as a Lehman banker? C'mon.

Apple's core (ha ha) markets:

1) Consumers—Massive decline in real household wealth means far less purchasing power overall. This has always translated into poor sales for premium priced brands. Always. There has never been an exception in any downturn. Never. Apple explicitly states it is a premium brand. One market survey in New York I read projected a decline of as much as 30% traffic at Apple Stores in the city, based on comparison to other premium brand stores that target the same demographic. Apple is no exception to macro trends in the broader economy.

2) Business—For Apple, can pretty much be summed up as advertising, media and news. All are in deep, deep trouble. After financials and housing this is the worst hit sector of the economy. It also generates about 40% of Apple's margins because this is the Pro line market. Advertising agencies are seeing budgets slashed by as much as 60% with no end in sight. Apple's bottom line has not reflected that in 2009 most of major customers for the big iron will simply not be making capital purchases. I know marketing agencies who have seen no new work since September and who bought new machines every year. Not this year.

3) Institutions—In case no one has noticed, this sector accounts for about 15% of all Apple sales, especially of iMacs and MacBooks. It is hard to ignore that local tax revenues are plummeting and school systems are dramatically slashing budgets (like California). My education sources (I used to work in education sales, selling Macs) tell me orders are expected to be off almost 50%from last year. Remember: the 2008 results reflect 2007 spending decisions. A net decline in units sold is already being factored into contracts. Within 3 months institution orders for Apple products will be down by at least 30% and accelerating. This will not reverse itself until state finances improve.

These are realities that are unavoidable. Simply put gross sales must decline in both remittances and units. This means that Apple has product oversupply. All the new, clever and cute products Apple releases cannot undo the market fundamentals that high prices inhibit sales in a severe recession, and certain buying segments simply stop buying. The vast bulk of Apple's gross revenues come from its Mac line. Consumers simply do not have the disposable income to make up those lost revenue streams.

Apple does not have a major presence in corporate and small business sales where tax advantages for depreciation can keep the capital purchases chugging along. Where Apple has been traditionally strong is precisely where the market is in the worst shape. This is not good for both the short and long term.

In terms of the stock value, has the market future priced Apple? No. There is always a a delay on capital asset purchasing and so far the P/E has not reflected those declines. They will. So far Apple's stock decline has simply matched the market's average. Its cash on hand, slick inventory system and strong management are buffers they will need to use, but the inevitable conclusion is Apple is going to see a drop in unit sales and therefore revenue. 2009 is going to be a very difficult year for Apple.

The stock will face significant downward pressure in the coming months. I am shorting it (when/if Jobs comes back in June, it will rally; if not it will tank even more).

A Good Time to Buy Apple

On Mar 02 09:02 PM Roger Knights wrote:

> Aristophanes wrote:
> "The iPod line is nearing its tipping point in terms of market relevance
> with the rise of the all-in-one smartphone."
>
> But actually owners of iPods are on an upgrade path to the iPhone,
> because it's the only smartphone on which they can play all the DRM'd
> music they've bought from Apple.

No. They can un-DRM and get a far cheaper package from other providers at better operational value.

Historically, expensive cellphone plans have been amongst the first casualties in a downturn, and they take along, long time to bounce back. This is not a time to be the premium price brand.

> "It has failures that sit and stagnate on the technology side, like
> the AppleTV."
>
> This may turn around if they play their cards right, according to
> various online speculations.

"Various online speculations"??? Notoriously unreliable.

The demand for flat-panel TV's is in steep decline. The market for all non-basic cable services is in freefall right now. Speculate all you want, but the consumer base for new vectors of transmission at Apple's typical premium pricing are gone.

> "Revenues from its international sales are going to plummet."
>
> Unless they seize the nettle and license their OS to box-makers in
> the 2nd and 3rd world.

Absolutely not going to happen. Apple is all about margin and there is no way any 3rd part, developing world source could keep a grey market Apple system at bay.

And there is no 2nd world anymore. It fell with the Berlin Wall.

> "Apple needs to adjust its model line and price structures to weather
> a massive economic downturn. This company is not immune to overall
> conditions. They are behind the general curve with a large part of
> that intransigence embedded in the egos of some of its management
> whose vision of the customer base are not matched by reality. ...
> Any signs of changing behaviour? No. None. This is a company whose
> past behaviour has choked its growth. It can happen again."
>
> I agree. And yet this is not an intractable issue. The company is
> not boxed in by outside factors beyond its control. It could think
> different. Therefore, there is massive upside potential in the stock.
> A good sign of fresh thinking would be if it prices its re-do of
> the Mac Mini (due in a few months) aggressively and upgrades its
> features, even though this would cut into iMac sales.

Apple tends to box itself in when reacting to external forces. It is extremely resistant to external pressure, more as a point of pride than practicality. Its margins are tenuously based on premium, bundled pricing (the iMac).

When consumers start to price parse—as they always do during a downturn—Apple always struggles to redefine itself. Apple can be very flexible and speedy in remodelling its product line, but that's not the same as price cutting to keep/gain market share and gross revenues on a unit-by-unit basis. This downturn is so severe that it implicates Apple's entire business model as disposable income dries up. Premium pricing on base consumer goods is not where you want to be right now. They need a low end desktop with no screen, a much cheaper iPhone plan, and some price cutting, using that cash hoard to keep the gross sales where they need to be. The education market is going to rapidly drop Apple unless price cuts are coming. I am not talking about a $100 per iMac cut; I am talking about a 25% cut to match what is available from Dell. My sources say Apple is going to struggle enormously to maintain some very large education accounts without major concessions on price.

A Good Time to Buy Apple

I use a Mac and really like the company with its cash balance and superb inventory control, deep and experienced management team, as well as its streamlined product line and stellar marketing. The Apple Store system is going to be a drag in the next few, troubled years, but it's high operational costs are an important anchor to the company profile and service reputation.

But it has a leadership problem with the Steve Jobs ambiguity. It has missed or is choosing to ignore the netbook revolution, opting instead for the poor selling MacBook Air at 4x the price point. It has pricing issues that in an up market look amazing, but in a down market like we are seeing, can crater badly (as happened in the early 1990's). It's cellphone alliances are problematic because they are very price sensitive. It has failures that sit and stagnate on the technology side, like the AppleTV. The iPod line is nearing its tipping point in terms of market relevance with the rise of the all-in-one smartphone. Its Pro software line is upgraded less often than its competition (Adobe). It makes mistakes and takes too long to fix them (MobileMe). Revenues from its international sales are going to plummet.

Worse, its presence in education sales where capital investment is 90% price determined, looks iffy. If Apple does not change it pricing models for this type of downturn, it will go backwards very fast on its institutional education sales. This would undo about 8 years of determined effort to stay strong in this critical market segment. I worked in this field and my old contacts are telling me of waves of trouble for Apple ahead.

The company's products appeal to an upscale set of buyers who look for value but are still conscious of price in that quotient. Market share matters. Price matters. Some say otherwise, but that is a low-hanging-fruit opinion in a rising economy. The game totally changes in this fiscal climate. Apple needs to adjust its model line and price structures to weather a massive economic downturn. This company is not immune to overall conditions. They are behind the general curve with a large part of that intransigence embedded in the egos of some of its management whose vision of the customer base are not matched by reality. Given their rep, they need to be ahead of the curve and alter behaviour. They have a massive cash cushion to be proactive in the face of a recession now seen to be at least 14 months on. Any signs of changing behaviour? No. None. This is a company whose past behaviour has choked its growth. It can happen again.

Sell the stock. This Apple is about be bruised.

How About a Piece of the Apple Pie?

Smart companies have lots of cash. Apple has lots of cash. It also has the best inventory manager in the business in Tim Cook.

Apple has passed the cult phase. When they booked out of future Macworld's they said so explicitly.

However, their product pricing is a severe problem. The point of having cash is to be able to react. They will need to spend some of it to keep from backsliding in market share. pricing is important and Apple has been to focussed on the higher margins. That's good in a positive economy, but can be extremely problematic in downtimes. Market share is a valid measure and it needs to be moved up Apple's agenda a few notches now. The last thing Apple needs is to price themselves into elite, boutique oblivion.