10 Reasons Not to Buy Apple

by: Hao Jin, CFA

1. Highly competitive markets

The chart below shows Apple's (NASDAQ:AAPL) revenue share according to product. All of Apple’s product lines are in highly competitive markets and subject to rapid technological change and aggressive pricing. For example, the iPhone faces increasing competition from other Smart Phone makers like Nokia (NYSE:NOK), Research In Motion (RIMM), Palm (PALM), and even Google (NASDAQ:GOOG).
2. Lower margin
Business Week reported on June 19, 2009 that the cost of components for Apple’s iPhone 3G is $179.16, while its retail price starts at $199. The App Store offers a selection of more than 50,000 applications for iPhone users to download. However, App revenue per phone is about $27 and Apple’s share of that is 30%, or about $8, according to The Wall Street Journal (source).
3. iPhone relies on single carrier
In countries like the U.S., U.K., Germany, Spain and Ireland, Apple relies on a single cellular network carrier to provide service for the iPhone on an exclusive basis.
4. No room to grow for wireless market
In the US, 90% of Americans eligible to use a cell phone already have an account. There is simply no meaningful growth in this market sector.
5. No room for iPod growth
iPod accounts for 39% of Apple’s revenue, more than Mac. Sony Corporation (NYSE:SNE) has sold 385 million Walkman machines worldwide in 30 years. Apple has sold more than 210 million iPod machines worldwide in eight years. (source).
Apple has a Microsoft-like monopoly on the MP3 player market. In the US, the iPod has nearly 90% market share. The iTunes music store sells 80% of all digital music sold online. It’s the 3rd largest music retailer in the US, just behind Wal-Mart Stores Inc. (NYSE:WMT) and Best Buy Co. Inc. (NYSE:BBY), according to Leander Kahney, author of Inside Steve’s Brain.
6. Wrong market target
Apple’s goal is to “provide consumers with a better lifestyle experience.” Unlike Research In Motion, Apple’s target segment is consumers and small/mid-sized business ("SMB"). We are still in the middle of a global consumer crisis and Apple isn't immune to the downturn. Apple's slice of the U.S. computer market fell to 8% in the fourth quarter of 2008, from 9.5% in the third quarter of 2008, according to Forbes (source).
Besides, except for few fans/geeks, consumers are not really eager to upgrade to new gadgets. A study found that the average American consumer will fumble with a new device for only 20 minutes before giving up and returning it to the store, even though these days most devices are “Plug and Play” (better than “Plug and Pray” a few years ago).
7. Heavy investment needed for Mac stores
Apple had 252 stores open as of March 28, 2009. They required substantial fixed investment in equipment, lease improvements and inventory controls.
8. Steve’s health
There’s little evidence that increased R&D investment is linked to better results. It’s the process, not the pocketbook, according to the management consultancy Booz Allen. Without Steve Jobs, no matter how much more money Apple spends in R&D, there are unlikely to be more many new, revolutionary products coming to market from Apple soon.
9. Unclear future strategy
The next big thing in consumer electronics seems to be in home digital entertainment. With iPhone, Apple is moving into communications. I doubt iPhone could be a central control for home entertainment systems.
10. SEC investigation
Apple’s past stock option practices and the restatement of financial statements may result in additional litigation against the company.
The tech sector might be a good place to be in this uncertain environment, as most tech companies have plenty of cash and little or no debt. However, it is hard to predict who would be the winner. For me, ETFs such as PowerShares QQQ (QQQQ) or the Technology Select Sector SPDR (NYSEARCA:XLK) are a safer bet.
Disclose: I have long position on QQQQ.