3 Signs Apple Is Turning: A Rebuttal

| About: Apple Inc. (AAPL)
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Apple (NASDAQ:AAPL) is topping, says fellow SA blogger The Independent Investor (18 September), and he goes ahead to list his arguments. I strongly disagree. The article is full of fallacious thinking.

Obviously Apple will see a top sometime - that is what stock prices do, have local highs then retreat and rebuild. However, I do not see this happening before it moves significantly higher. Additionally, I believe it will continue to run up from a temporary consolidation until it hits a high of just over $900. From there it will retract for several months.

The impending demise of Apple has long been predicted, as have innumerable reasons for at least its stock to fall. Not quite a year ago Leonid Kapoka opined "The Apple Bubble is Ready to Burst!"

Like the Chinese economy, Apple has spiraled out of control for the past several years. The more innovative its products became, the more attention it received. However, like the Chinese economy, there has been no "cooling" to the excessive upward trend, and it appears the mighty AAPL is overheating.

The stock is currently trading in the upper $300s and appears to be highly overvalued, but its innovation has blinded the investor.

On that day it closed at $378, today we approach double that price. This is not to say that Apple will continue up forever. That is obviously impossible. It will top when it has reached the end of its expansive growth phase, and settles into a more sustainable, low-growth phase. Before then there will be local tops, when the market conditions call for one.

A fist full of fallacies

The more recent article (3 Signs...) is full of fallacious thinking.

"…but the stock has performed only in-line with the market of recent."

Well, with a volatile stock such as Apple, you can always find a short period of time in which it underperforms some benchmark. This really indicates nothing. Apple is notorious for going through phases of very rapid rise of the stock price, followed by a small drop and then a fairly long period of sideways consolidation. All you need to do is pick one of these consolidation, and you may find that Apple underperforms the overall market.

The first warning sign that Apple's share may be peaking is that the stock has already likely priced very optimistic iPhone 5 earnings. Apple analysts have notoriously been horribly inaccurate at assessing quarterly earnings as the iPad has narrowed the company's margins.

Yes, with the exception of two quarters, analysts have grossly underestimated Apple's revenue and income. Realistically, this is more of an argument for Apple's price going up rather than going down.

With Apple's margins shrinking,

What shrinking? "Gross margin was 42.8 percent compared to 41.7 percent in the year-ago quarter." [Apple FQ3 report] Last I heard, 42 is larger than 41. If the comparison was to the previous quarter, we all know that such comparisons are not particularly relevant since they depend on cyclical patterns.

The second reason why Apple's shares likely have limited upside is because bullishness is peaking.

The author then goes on to point out how bullish the mood is. So, unless you are a contrarian, he wants you to think that we are at a top because the market is so bullish?

Volatility levels in Apple puts are at one-year lows…

He gives the following chart to illustrate.


Here the reasoning is very odd. In fact, one could look at the chart and conclude instead the direct opposite. Here it seems that the volatility is a trailing indicator. Look at December of last year (more or less). There was a low around $370, but the volatility was high. As the stock began a long major rally, the volatility moved sideways and slightly down, until the end of January when it dropped. Only then did it begin a climb that mirrored the stock price. The stock reached a peak ($640-ish) around April, dropped sharply, to a low around $540 in June. (Note this peak was about 75% rise.)

Finally, after a more or less sidewise consolidation, there was a local low hit in late July, when the next sharp rise began. At this point the volatility also plunged and has since begun a new rise, paralleling the previous pattern I just noted. If this pattern should repeat itself, and the run will take us another 75% (from July's low of $540), then it will hit a high of $945 before the next significant consolidation. Even if we pause at $800, it is still a ways to this local top.

For an alternative chart:

A "Supercross" by SIA Charts

(By SIA-Charts)

Finally, here is a twisted piece of logic if ever I saw one:

The third reason the company is likely topping is because the PC market is becoming increasingly cannibalized by tablets…

Yes, and it is the iPad that is cannibalizing that market. So if Apple sells more iPads, then the share price will go down?


Apple is facing new competition from Google's (NASDAQ:GOOG) Android phones, and from Microsoft (NASDAQ:MSFT) WP8 devices that are coming onto the market soon, such as Nokia's (NYSE:NOK) new Lumia 920 that looks like a very nice piece of hardware. But none of these issues are seriously addressed in the article. And even these threats do not seem to have hampered sales of the new iPhone 5, which just smashed all pre-sale records. Nor have any of the scores of tablets so far displaced the iPad as the undisputed favorite.

So, sure, we will decidedly come across some local top, but I don't think we will see it in the next week (barring major external events). As for a permanent top, as long as the markets for smartphones and tablets are increasing, Apple is going to continue its growth.

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.