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There Is No Such Thing As A Bitter Apple

|Includes: Apple Inc. (AAPL)

Apple's continued business success has drawn many critics particularly from those who have missed the ride. A common line I hear from such folk is that now is the time to short Apple AAPL their arguments generally go along the line of Apple are ripping off customers with the margins, and that at some point Apple has to make a "duff" product. Be warned! Do not listen!

The most popular phone system sold is on the Android system (50%), not ios (25%). Leaving Apple large market share to expand into in the smartphone segment, while the overall market continues to grow as the global middle class expands (an additional 500m-1bn will be included in this decade) and the structural trend into mobile, particularly smartphones, continues.

The only area of potential doubt would be the margins on Apple's products, how sustainable are they? Well, Samsung and others make (albeit smaller margins, but substantially large ones also). Also, undeniably the iphone is the leading phone. Some technology specialists *apple skeptics* will claim the latest Samsung has some better features, but in reality the perceived view in the public domain is that Apple is sexy, cool and by far the desired and best phone (most specialists agree with this view)

Apple has grown since the start of the financial crisis in 2007, from top-line revenues of $24bn to 2011's $108bn. Thus in spite of a major economic crisis in the US, and the recent recession in Europe and slowdown in Asia, Apple still managed to grow in an unbelievable manner. If one looks at the growth of Apple, the majority of it has come from overseas, for although US sales have grown from $22bn in 2009 to $42bn today - which is staggering in itself. Non-US sales have grown from $21bn in 2009 to $66bn today. Quite simply Apple is more than just an innovation story, but more a play on Emerging markets and structural trends on a global level.

Apple is actually cheaply priced on an Earnings basis, 16.7x for a leading technology company is peanuts. One only has to look at the Nasdaq today on 21x, and the S&P on 14.7x to realize that Apple is not expensive on any earnings metric. Adjusting Apple for cash makes it look like a bargain! But perhaps it is unfair to do this due to the nature of R&D and inventory cycles that Apple has - but even then the Cost of Sales and R&D for 2011 was $68bn, still below Apple's 2011 cash position of $98bn (which is expected to expand heavily this year).

The concept that consumers tomorrow are going to care more about margins than they are today/yesterday is really quite ludicrous when it comes to Apple. Why? Well, we have just been through a global recession where unemployment has peaked, and living standards bottomed (unless you believe we are heading back into recession). Global growth, which despite slowing somewhat in the last 6 months is still expanding rapidly, and as long as it is expanding the global middle class will be richer and the marginal demand for more "luxury goods" like the i-phone or i-pad will increase only.

Being short Apple, would not just be fighting the bulls, but also the new stock buyback and dividend program, which will pay $45bn in 3 years. This is the start of something new for Apple, which will no doubt bring in new investors, aswell as strengthen EPS with the buyback, and shareholder returns, aswell as making shorting more expensive.

To summarize what will continue to push, or at least, maintain the share price of Apple:

1. Global middle class expanding (500+million this decade)
2. Global economy returning to growth (still higher normalized growth to come)
3. Market share to be taken from Google's Android system (50%)
4. Continued growth in the smartphone market (still too low a % of global population own a smart phone)
5. Returning cash to shareholders, any short is facing a wall of cash.
6. Cheap P/E on the most innovative company in the world.

Simply put, you would be mad to attempt to short Apple. The only case is if recession returns on a global level, but this is less stock specific and more industry/cyclically related. There is no bubble in Apple!

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