Monday, March 19, 2012

Why I Am Bearish on Apple

As a long-term investment, Apple has no where to go but down.

Apple announced today that that would pay a dividend of $2.65 a share and buy back $10 Billion in stock.  Both are bad moves.  I am not bullish on Apple stock, even as it soars in price and the company makes record profits.

By the way, the idiot media, on NPR, reports this as a "first ever dividend!" for Apple.   Nice way to do your homework, NPR!  But Apple did pay dividends, back in the day when it thought it was successful and would be, forever.  Times changed, and they stopped paying dividends.  Now they are, again.

But to the eighth-graders running NPR, well, that was before they were born, so it doesn't count, I guess.

What could possibly go wrong with Apple?  Everything.

To begin with, buying back the stock is problematic.   At the current stock price, they are buying back shares at the highest possible price.    Ford did this, when it was soaring at $40 a share, and as a shareholder, I thought, "Great, this will make the price go even higher!"   It did not.  In fact, it dropped to about $8 a share and stayed there, as the market for highly profitable jumbo SUVs dried up and people realized that paying $10,000 more for a pickup truck with a seat in the back was idiotic.   As I noted in another posting, buying back stock is one way a company can pay shareholders - by increasing the values of shares.  But there are other reasons to do this as well - to pay back high-level employees.

In this instance, they are buying back shares only to prevent the stock from being diluted.  Huh?  Well, it turns out, they owe their employees a lot of money - in the form of stock options.  And as the company grants those options and churns out more shares, the price-per-share will go down, making the stock options worth less.

Hmmmm...... So, buying back shares shores up the price, making stock options worth more.   Who makes this decision?  The guy getting the stock option.   Who wins?  You, the little guy who bought 10 shares of Apple?  No.  The Executive who exercises his option and cashes in on a million shares - which chumps like you and me buy, because the new iPad makes us wet.

In other words, they are using this huge war chest of money to pay themselves on the inside.  They can't just hand themselves bonus after bonus - that would be unseemly.   But a previously promised stock option?  What is the harm in that?  Just be sure to spike the share price and you are sure to cash in, big time.

So while these announcements might sound like "good news" for shareholders, they really aren't.  The dividend works out to a paltry 1.8% at the current price.   As they buy up more shares and the price tops $600 a share, this dividend will shrink in value further.  In other words, if you are buying this stock for the dividend, you might as well buy Treasury Bonds.  They at least pay 2-4%, depending on term.

I won't repeat the comments made in my previous post.  Bottom line is that proprietary "sealed box" technology is never going to take the world by storm, unless it is a government-granted monopoly like the phone company used to be.   People will gravitate toward cheaper pad devices running more open-sourced software, such as Android.  And eventually, the apps for such open-sourced or open architecture will outnumber that for Apple - just as it did for the Apple computer and Mac.

Apple's basic business model dictates that it will always be a margin player.  The market abhors monopolies, cartels, single-source technology, sealed-box technology, and the like.  And yet, this is Apple's primary business model - you buy it all from us, and tough shit if you don't like the price.  IBM did this for decades - but eventually, it too, fell victim to the marketplace, ironically as the result of a product it introduced - the IBM PC.

And no, the competition isn't sitting idly by and saying, "Gosh, golly, gee-whiz, I only wish we could make a competing product to the iPad!  But we're too dumb and lazy to do so!"   No, that isn't going to happen.  No, they are going to bring out competing devices at prices closer to their actual value and cost.   Just as the jumbo profits on SUVs encouraged competition from Japan and Europe, the same will be true in the pad market.  Apple has a head-start, but others will quickly catch up, as they already have in the smart phone segment.

Apple products are expensive and just not that great.  The vaunted interface is clumsy, and if anything breaks, well, you have to send it back to the factory for repair.  Most people want something cheaper and easier to use.

I suspect that 2012 will be a banner year for Apple.  The stock will likely soar to $600 a share or more - based on the dreams of small investors who see the big profits but not the big picture.   But the problem with banner years is, what's next?  They cannot grow the market share without bringing down prices - which in turn reduces margins and profitability.  They have to come up with a "next big thing" and it is hard to fathom what that could be.

If you buy Apple at $600 a share, you may be buying at the peak - like buying gold at $1800.

The secret in investing, is not to pick winners who have already won, but to pick the companies that are on their way up, or have a steady history of growth.   Long-term, such stocks increase in value and rate of return.

Buying the peak of the mountain leaves you nowhere to climb.  And often, particularly with tech stocks, they can fall quite a long way.