Monday, March 5, 2012

Should You Buy Apple Stock? Maybe Not.

Is Apple a good buy?  No, because everyone is buying it.  Run away when everyone jumps on the bandwagon.

NOTE:  See my posting, Why I am Bearish On Apple for more discussion.

Should you buy Apple Stock?  I think not.  It is the talk of the town right now, because of a lot of mindless press - just as Facebook and other "dot com" stocks are.    But I think that Apple stock is due for a correction, and this will probably happen in later 2012, perhaps early 2013, when a lot of these "dot coma" and tech stocks "correct" - when people realize they aren't worth all that.

There are a lot of misconceptions about Apple:

1.  Steve Jobs was a bloody genius who invented the personal computer, the mouse, and the graphical user interface:  No, not really.  A lot of people were experimenting with personal computers in the early 1970's as companies like Intel introduced processors-on-a-chip that were intended originally for industrial controls.  Most of these were CP/M systems.  Apple was in the right place at the right time with an inexpensive product with a catchy name.  The GUI, mouse, networking, and e-mail were all ideas from XEROX Palo Alto Research Center that were discarded by Xerox ("We're a document company, not a computer company").  Both Jobs and Gates were there to see what Xerox had developed and they took it and ran with it - and created the Mac and Windows, respectively.  No geniuses, just opportunists.

2.  Steve Jobs invented the iPod, iPhone, and iPad:  Not really, either.  Products like that are a communal effort among a number of Engineers.  And again, Apple scored a marketing hit (not a technology hit) by purchasing the first two year's output of 1" hard drives, making it impossible for competitors to make a "me too" product for several years.  That cemented the iPod's place in history.  The iPhone and iPad were great follow-on products, but really just variations on what others were doing in the smart-phone field.

3.  Apple is worth $500 Billion:  Market Cap is a nonsense figure, and is arrived at by multiplying the price the last chump paid for a share by the overall number of shares.  This does not represent the "value" of the company, the liquidation value, value of assets, anything.  It means nothing, but the idiot market press makes a big deal about it on slow news days.

4. Apple Stock will Keep Going Up:  As this report notes, clueless retail traders (schmucks like you and me) buy stocks based on headlines - and we get creamed.  People keep hearing about Apple, so they think the stock is good.   This is the worst way to buy stocks.  Apple is profitable.  Apple has a lot of cash on hand.  Apple has great products and a great future.  But that does not mean the price will keep going up, indefinitely, like mini-mansions in Fort Lauderdale did.  Oh, wait...

5.  Apple Will Continue to be as Profitable as it is:  Past performance is no guarantee of future returns, as they say.  Apple has some market wins - right now.   But the wireless companies are nervous about being dependent on one supplier - one supplier who demands a lion's share of the loot.  So they are looking to alternatives - the droid platform, the windows platform, and whatever else is out there.  Nokia is hurting.  So is Research In Motion.  But one or more of these companies will come together with an alternative product at a reduced cost, which could threaten Apple's market share.  Already, the droid platform has nearly double the market share Apple does.  Bear in mind that Apple had the lion's share of the PC market in 1981, and then the IBM-PC was introduced, and within a year, the Apple Computer market share dropped down to nearly nothing.  Things change in the tech world, in a hurry.  Could Droid be the PC to the iPhone?

Apple stock has skyrocketed in recent years. Usually when stocks go way up like this, it is too late to jump on board. A good buy in 2009, 2010, or even 2011.    It is not a good buy THIS YEAR.

If you look at the Apple P/E ratio, today and historically, it is interesting.   The ratio right now is a pretty decent 15 or so, which for a tech company is astounding.   But not so long ago, it was up closer to 50, even though the stock price was far, far lower.   What's up with that?  If the stock price is low, the P/E ratio should be high, and if the stock price is high, then the P/E ratio should be lower.

Unless, that is, the profits back in 2009 were in the tank, yielding a 40+ P/E ratio even as the stock was worth less than $100 a share.  In other words, not long ago, Apple was not doing so well.  Its successes have been many, but many of them are very recent and not very long-term trends - perhaps only a few years, at most.  The iPhone seems like it is everywhere and everyone has one.   But just a few short years ago, the product did not exist, and Apple was trying to get by on iPods and MacBooks.

In the last two months, the price of the stock has soared dramatically, from under $400 a share to nearly $600 a share.  Yes, the P/E ratio might support this, but of course Apple does not pay any dividends at the present time, even though it is awash in cash (some shareholders are pushing for Apple to pay dividends.  It remains to be seen if this will happen.  It could be the worst decision they make).

The real threat to Apple is China.  An iPhone retails for about $499, even if carriers offer it for "free" or for $99 or whatever (the cost is folded into the data plan, which usually requires a contract - TANSTAAFL!).  In other words, while the iPhone is hip and trendy - as is the iPad, both are very expensive devices in the market.  Price pressure could strip Apple of this wild profitability in the long run.  While the trendy Apple faithful might pay 4-5 times as much for an appliance if it is offered in Apple-white, the rest of the market likely will not.  As a result, in order to gain market share, Apple will have to come up with a price-competitive product.

The Chinese are developing smart phones of their own, which run Android or other operating systems.  Since they are freed from doing O/S development, they can concentrate on making the hardware cheaply.   And costs are running in the $100 to $150 range.

And of course, these Chinese phones can be just as good as the Apple.   After all, the iPhone is made in.....China.

In a way, it is the Apple II versus IBM PC battle, all over again.  The PC was open source - you could buy the machine from anyone, and so long as you had a copy of MS-DOS, you could run a huge number of programs.  The Apple was closed-source, requiring you to buy the hardware and O/S from one place and one place only - Apple.

Historically, the market has reacted negatively and strongly against monopolies, which is why today, PCs dominate the market while Macintosh computers are an interesting and expensive toy for a select few.  why pay $2000 for a Mac when a PC is $499?

Apple has a monopoly on its App store and its iPhone and iPhone O/S.  And it charges a premium for these things, a premium that is paid for by the wireless companies and then bundled onto your phone bill.   Some wireless companies are actually losing money on the iPhone, but feel compelled to carry it, to attract subscribers.

But it won't be long before some wireless company realizes it can offer a $99 generic phones and thus be more profitable and offer lower-cost plans to consumers.

It is simple mathematics.  Nature abhors a vacuum.  Silicon Valley abhors a monopoly.  Too many people will be gunning for a slice of this pie:
While Apple has a sizable smart phone market share, note who has the lion's share of the business - Google Android.  Since this pie chart was done, Google now represents nearly half the market, while the Apple iOS is about 30%

The Android platform increased its lead in market share to 46.9 percent in the three months ending in November, up 3.1 percentage points from the three months ending in August. The iPhone platform increased its market share by 1.4 percentage points, to 28.7 percent. Combined, the two had a market share of 75.6 percent.

What is interesting is that the market is quickly shaking out to a two-player market - Apple and Android, with the Windows/Nokia phone being the wild card.   And who knows?  Maybe Research in Motion will get their act together.    Pretty much everyone has written the obituary on Blackberry, which is now down to 16% market share.  Funny thing, this time last year, they were about even with Apple.  But it is Android seems to be grabbing more share, and doing it more quickly.

Fortunes can change rapidly in the tech world, particularly in the volatile wireless market.  Ask Nokia.  Ask Research In Motion.  Ask Motorola.  One minute you're hot, the next minute you're not.

In order to justify Apple's stock price - you have to assume they can maintain their current level of profitability indefinitely.  In order to justify the stock going up, they have to increase profitability.  I find it hard to see either happening.

And basically, when you see a stock ZOOM up in price, what usually happens?  If you are lucky, it just stays there - it doesn't keep zooming.  In most cases, it zooms back down again.  I never buy a stock that has already shot up in price.   The train has already left the station, and you were not aboard.  Wave to the nice people and hope they don't get into a wreck.  You don't have to try to get in on every "big thing" that is talked about in the press - particularly once the press has gotten a hold of it and it is too late.

And I'm sorry, but I don't drink the Kool-Aid with Apple.  Steve Jobs was a great guy, but like Bill Gates, he was more of a marketing genius and in the right place at the right time, than a visionary computer guru.  A lot of people like to imbue Apple with a lot of emotional baggage - that the are the Dali Lama of computer companies.  But the Dali Lama ain't even the Dali Lama.  And there is nothing mystical or magical about Apple products that can't be copied by everyone else.

And in fact, the proprietary "sealed box" nature of Apple gear is in fact its weak point.  While Apple products are user-friendly, they are only so until they break.  I can put a new battery in my cell phone.  I can replace the SIM chip.  I can replace the hard drive, the memory DIMMs and the video card in my PC or the hard drive in my laptop (and I have done all of these things).   Apple products require a trip to the factory for repair by "authorized personnel."  Expensive to buy, expensive to own, expensive to repair.  This leaves a huge vulnerability for an opponent to exploit.

So no, I won't be buying $550 a share Apple stock, or going Gee-Whiz about a $500 Billion "Market Cap" which is meaningless.  Because while the company is doing well, I just don't see a huge growth model here - not when all the products can be readily copied by others for half the cost.