Apple Slim Down, Buy When There's Blood In The Streets

| About: Apple Inc. (AAPL)

At a local discount superstore …

Apple's (NASDAQ:AAPL) stock price has plummeted -19.9% since the beginning of '13. It is actually almost completely negatively correlated with SPDR S&P 500 (NYSEARCA:SPY) coming in with a correlation of -.82553.

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A distracted mother leads to a crisis …

In a desperate attempt to reconcile the insanity, investors are coming up with all kinds of irrational schemes, including cash redistribution, preferred stock issuance, and even government subsidies. All the while conceding Android has won the smartphone war with Samsung (OTC:SSNLF) as its champion.

Operating System

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4Q12 Market Share

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BlackBerry (NASDAQ:BBRY)





Microsoft (NASDAQ:MSFT)

























Source: Gartner (in thousands)

In quarter 4 the Android OS beat iOS by 101,263 thousand units, it is estimated that Samsung took about 42.5% of the Android market, placing them at 61,506 thousand units. The growth of the Android market is not unexpected. Within weeks of its release and other outsourcing sites were filled with devices running the operating system. Google's (NASDAQ:GOOG) share price is up 12.59% YTD with a correlation to SPDR S&P 500 of .89146.

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What's this? Another troubled company in danger? Who will save it?

Investors have been blaming Tim Cook for his lackluster song and dance abilities and his lack of innovation. It has even been suggested that he is a failure because he has not generated any new products.

He is a supply chain specialist and was most likely appointed by Steve Jobs to lead the company through supply chain issues. In December 2012, Apple released the iPhone 5 in Africa and it gained 15.2% market share in India where it is now in second place behind Samsung. Tim Cook pledged to release the iPhone 5 in 100 countries by January. While investors are skipping scenes demanding new products and innovation, Tim Cook is sticking to the script. In order for the Apple TV to be successful, since it is a lower margin product, it will need to acquire a larger economy of scale. Therefore, the Apple brand needs to penetrate the global economy before it launches more products.

Meanwhile back at the Apple Mansion

It is no longer about the amazing new revolutionary product that will change the way you compute. It is now going to be about enhancing the already produced products. Consider the PC industry in the 90's, after a certain point the computer itself did not change, only the hardware inside of it changed, certain parts were miniaturized, and the interfaces were updated. Samsung's clever idea of controlling the interface with your eyes is foreshadowing the next phase of development (hmm…retina display). The companies will compete on how to most efficiently integrate all these new devices into our daily lives.

Now this is probably going to be expensive. Programmers are getting rock star salaries in Silicon Valley to develop for mobile products. But not to fear Apple has a lot of cash (stacks on deck). More cash than Google, which just spent $10b. Now this is just speculation but if Apple is selling the iPhone 5 in the global market place this quarter, should this increase its cash position while its competitors are spending to keep up. It could also be spending to launch a new product, which will increase its presence in a totally different market. Worst case scenario is it does not gain any new market share globally, while it spends all its cash on something like a special dividend decreasing its advantage. It could be argued that Apple won the market share battle against Google because they gained customers, while increasing cash. In a new market, the market share is not the best figure because it is growing. Android has a larger appeal because of its price points and availability, but this does not mean it will be the most profitable.

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Duty calls

The market is being extremely pessimistic at the current valuation. In the short term, the stock may hit continuing headwinds, due to the ongoing misconceptions that industries need to be revolutionized every 36 months and there cannot be multiple platforms for a device (since when hasn't there been). It seems Apple has developed a strong hold on the market. It already has iPhones for sale at different price points. It has begun developing different types of amortization plans in countries where phones are not subsidized by the carrier. It is planning to launch Apple TV and the iWatch. Investors need to stop pushing for special dividends because they bought into a high growth/high competition industry and Apple will need the cash to continue to innovate and expand in a still growing market.

Guess who's back

Meanwhile, Microsoft has been moving around in the background. It extracted a $12-13 fee from Samsung for each smartphone sold. It also launched its Surface platform, which sold 1.5 million units. It just helped take Dell (NASDAQ:DELL) private, allowing the PC Industry, the main platform for Microsoft's products a chance to catch up with the Apple and Samsung innovation juggernaut. Microsoft now has investments in Nokia (NYSE:NOK), a smartphone maker and Dell PC maker.

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It is commonly argued that Microsoft needs to somehow blast the doors off the mobile market place, when all they really need to do is hold onto their position and make incremental improvements. They did gain market share over the last year and they have been doing what they excel at making small investments in firms in order to gain influence in the design process and get a piece of everyone's action. It could be argued this is a much more efficient model than trying to reinvent the entire wheel. Especially, since it seems like Google and Apple are happy to innovate away.

We've created a monster

It looks like the dream of capitalism has in some ways come to fruition with multiple players in one industry driving innovation at a breathtaking pace, through competition at the international level. And they said globalism was dead.

Ready for action

Based on this chart it is safe to assume that Mr. Market is buying Google and selling Apple:

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While it would take balls of steel to short Google, it is definitely clear that a buying opportunity has presented itself in Apple shares, as the larger players have decided to drink the Google Kool Aid. The market would like to have you believe that Apple is going to fall off a cliff, into an ocean, and get eaten by sharks. The reality is the U.S. market is saturated for both operating systems and Apple needs to focus on expanding its footprint in the global market place.

With regards to the United States, this survey of smartphone consumers is sort of amazing at elucidating the situation, with 22% of Android users saying they are going to switch to the iPhone and 9% of iPhone users saying they are going to switch to Android. The average iPhone user is wealthier, the wealthy tend to set long-term trends. Finally, consumers who are about to purchase an iPhone 5 are 2x more excited than Android purchasers, suggesting that the switch could be users just trying something new and not a significant trend reversal.

Buy when there's blood in the streets.

Disclosure: I am long 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.

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