Saturday, January 31, 2015

Why I am Still Bearish on Apple

Apple is a one-trick pony, and that trick may get stale over time.

If you read the idiot news, you may be thinking that Apple did really well last quarter.   And it did, selling more iPhones than ever before, mostly because they made them slightly larger (Malibu Stacey has a New Hat!). 

And if you listen to the media, you might be lead to believe that Apple has the majority share of the smart phone market, at least in the US, perhaps the world.  Because that is all the media ever talks about - Apple.

But you'd be wrong about that.   Very wrong.


A few years back, I noted before that Apple had about 30% of the market in the USA to Android's 50% (a 2:1 advantage).  Since then, Apple has picked up some market share in the US, but this appears to be at the expense of Blackberry, not Android.   Android still holds steady in the US at over 50%, while Apple has bumped up to 40%.  Meanwhile, the Windows phone appears to have gone nowhere.

These numbers, of course are based on industry sales numbers - generated by computers which track sales.   Other folks use "surveys" such as this one from Raymond James - which shows that Apple users outnumber Android users.  This survey illustrates two things - first, that surveys are inherently flawed, as they are based on limited data pools and voluntary consumer responses, and second that Raymond James is probably not a great place to invest with, if this is how they analyze a market - with surveys.   Surveys are fine and all, but not when hard numbers are available.

But what is more disturbing than this lopsided market share is that Apple, the company, is really a one-trick pony.   The iPhone accounts for about 85% of Apple profits, and that is mostly because Apple charges (and gets) a premium price for the product.  And according to some folks, while Apple has a tiny market share, it takes in the lion's share of the overall profits in the smart phone industry.   Samsung makes much smaller profits on its smart phones, and thus concentrates on the lower end of the market.

But what would happen to Apple if they could no longer get these wild prices for what is quickly becoming a commodity item?   Will consumers continue to pay 2x to 3x for a smart phone, just to have the Apple logo on it?

Bad things could happen, and very quickly, if the cache of the Apple logo wore off anytime soon.   

And what product would Apple introduce to re-ignite the fire?  Apple Watch?  Apple Pay?

Samsung has already come out with three smart phone watches, and people have responded by, well, yawning.   While a nice toy, they are very expensive and have limited functions as the screens are so small and there is little room inside for hardware.   These physical limitations are very hard to overcome.  They are less a replacement for a smart phone than an accessory for someone who already has one.

Apple Pay is a neat idea, but the retail industry abhors a monopoly, and already the largest retailers in the country has taken a pass on the idea of handing over huge sums of money to Apple.   What the retailers want is something cheaper than Visa and Mastercard, not more expensive.

And since Apple only has a minority share of the overall market, places like Wal-Mart can afford to say "no" to Apple pay.

In other words, despite this good news for Apple, the company is still highly leveraged as a one-trick pony, like most tech companies.   So long as they can keep selling overpriced phones to an already saturated smart phone market, they can keep succeeding.   But as conquest sales become harder and harder to come by, this may be a difficult chore.

But beyond all that, buying the stock now still does not make any sense.  Yes, Apple finally agreed to pay a paltry dividend.   But that is not enough reason to buy the stock.   And unfortunately, the price of the stock remains high - but doesn't appear to have any headroom to go higher.   Unless you believe that the graph shown above will reverse, and Apple will go from 11% of the market back to over 20%, profitability isn't going to go up.   And the only way Apple could gain such a market share would be to lower prices, which in turn, would cut profitability.

And Apple's stock price has been a bit of a roller-coaster as of late, peaking at over $100 a share in 2012, only to drop to almost $50 a share in 2013 - and then back up to almost $120 a share today.   Once again, if we only had a working time machine, we could have doubled our money since last year.   But, of course, that does not mean it is a good buy today.   With a P/E ratio of 15.54 it is not an overpriced stock - based on current earnings.  But again, we have to hope this one product continues to sell, and continues to sell at a price far higher than the competition, in a market saturated with smart phones

So you see the corner Apple has painted itself into.   And sadly, they went out and built a huge white-elephant campus, based on the idea that today's profit levels will continue indefinitely.  If profit margins slim down, things could snowball out of hand in a real hurry.

Of course, Apple will stick around, but I don't see a lot of headroom here for the stock to go up much further.   Flashy headlines about "record profits" are fine and all, but they don't address the underlying weaknesses in the company.  Record sales today are fine - does that mean there will be record sales tomorrow?  Or does everyone who has one, already have one.

That and I doubt Samsung and the rest of the Android market will sit idly by in the meantime.   The cell phone business is murder in terms of competition.   Ask Nokia, Motorola, Ericsson, and Blackberry.   They'll tell you all about it - and each at one time was at the top of the heap.

Of course, you never know about these things.  BMW continues to be the most profitable car company on the planet, because people will pay twice as much for a BMW car - mostly for that little blue-and-white roundel on the hood.   Americans love status symbols, and they love to display them.  Apple sells a lot of product based on its logo alone.

But I think long-term, in the electronics business, devices start out hot and end up as commodity items.  Televisions, stereos computers, telephones, laptops, video games - you name it.  They were all once "hot" products in the market, and then they come down radically in price as they become more like commodity items.  We've seen this in every other electronic device, and there is no reason cell phones should be any exception to the rule.   Eventually the market becomes saturated with the devices, and then you can compete only on price, for the replacement market.

Long-term, this does not bode well for Apple.