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Posted by on Oct 18, 2011 in Opinion, TG Roundup

Is Apple Ripe?

Is Apple’s juggernaut going to slow down? I think so. Here is my take on Apple earnings and the company’s 1st miss since 2002.

Back in late 2003, one day as I was dropping my daughter at school I heard her say that she likes Apple’s cool new mp3 gadget, the iPod! (1st generation). I spent a few weeks in researching iPod’s potential and I loved the gadget so much, I bought one for my daughter and one for myself. And then I went on to buy a lot of Apple shares at a split adjusted price of 11.xx. In the following 6-8 months, the stock more than doubled. I wanted to hold my Apple stake for several years later. However, on the day after 2004 presidential election, I was a bit upset with the victory of George W Bush. Against my own rules of not getting emotional about stocks, I sold a rather large position in my Apple stock. [I blew the proceeds on some other weak stock, and that’s another story.]

For a brief period during the 2008 stock massacre, I bought Apple again in the mid 90s, two days later sold it close to 120. Bought it again in high 80s only to sell the shares as a stop-loss strategy a few days later. Since then, despite my negative opinion about many stocks, I did not touch Apple stock. As recently as a couple of months ago, I said I will not buy or sell Apple shares.

As you may have already known, Apple just reported their earnings. For the first time since 2002 (pre-iPod, pre Steve Jobs reentry), they missed earnings and sales expectations. It is really no big deal if such a behemoth missed expectations due to prevailing economic conditions. Nor does one quarter make a trend. But, I see the first signs of trouble for Apple’s premium products. The other day I asked a student who just bought HTC tablet, why he diddn’t go for Apple. His answer is that for web browsing and email needs, iPad is a waste of money. I share the same sentiment, but I own a HP TouchPad ($150) as well as iPad ($700). I don’t see any particular advantage to iPad over TouchPad. On our campus also increasingly I see more Android tablets than iPads.

Here is another potential trouble for Apple. In the last two years, MacBook Pro sold very well and even gained market share from PC notebooks. Now the commoditization of tablets will cut into high margin MacBook Pro. No signs of this yet in their earnings report. But, on campus, I am increasingly seeing more tablet users than notebook users.

Overall – if the economy falters, I cannot see why it won’t affect Apple sales. And the cheap Android tablets will take several bites out of Apple.  I still think that stock may have peaked already.

6 Comments

  1. Mohan garu asked:
    >>Here is a rhetorical question: If a “black swan” appears ever so frequently, is it still called black swan? Or, they are just brown-swans announcing the arrival of the REAL Black Swan? I think it is the latter.>>

    By nature the black swan event is unpredictable and scientific methods can not model it due to law of small probabilities. Even Nassim himself says he has no clue when one occurs but says one can only allocate a small risk capital just in case one ‘feels’ its coming over the horizon. You see the fallacy of this notion? How can you hedge for an event you never know if & when it happens and by how much to hedge. Think of it this way. Its a simple bell-curve probability distribution we all know from school math whos tails tend to infinity dminishing the probabilities ever so infinitismal as represented under the curve as you move away from the center/medial. Although the area covered beyond the 3 sigma (99.96%) is quite large almost infinity but the probability of such occurence as measured by the height under the tail is quite small. The evidence is in the average performance of Nassim’s own Universa hedgefund over last 20yrs. To me the black swan event is like death. We all know it occurs to each and every one of us but do we know when it occurs and how so we can adequately hedge such risk, if so with what and how much risk capital? On the down side anything can end at absolute ‘zero’. In other words you know the absolute limit of the downside. Lets say we are wrong and it goes the other way then sky is the limit and you get wiped out. Besides Nassim can probably get a private counter party for his trades to go very long (3-5yrs options) where as ordinary investors are lucky if they can find 2yr leaps on some of the underlying assets.

    To the point that are these frequent brown swans suggesting an ensuing imminent real black swan event? I don’t think so because its increasingly an interconnected world with information flowing at the speed of electrons and I think if anything collective hedging/avoidance of black swan event is causing more frequent but moderate impact mini swans you call brown swans (may be!).

    May be I confused the heck out of you but a second read may clarify a bit 🙂

  2. I’m not a stock picker but I think apple has yet to quench pent up thirst for their products outside US mainly in the affluent emerging market segments for whom it’s more of a status symbol than a productivity tool. If I recall this segment alone is close to a billion people adding all up. I like apple marketing strategy which is squeeze supply to generate anticipation and hence sustained demand just at right level that can support premium pricing. The real profits are coming from increased margins as volumes/scale allow suppliers to reduce prices. Also the virtual assistant in new iPhone 4S is a Stanford research institutes marvel nothing to sneeze about. If anything it’s going to be a game changer. My wild guess is another yr or so left in the stock run with opportunities to get in on dips.

    • Hari,

      My opinion is more dominated by the worldwide economic currents and a near certain implosion of sovereign debts in Europe, and stagflation in US. Even if the well to do continue to buy Apple products, the coming contraction is nothing to sneeze about. The Feds and the President cannot do anything about it. They spent all their bullets. The clowns in the dysfunctional congress can’t do anything either. The time to pay the piper may have, finally, arrived.

      Here is a rhetorical question: If a “black swan” appears ever so frequently, is it still called black swan? Or, they are just brown-swans announcing the arrival of the REAL Black Swan? I think it is the latter.

    • I guess the stock might hold on for a bit longer. My take is totally different. Its about differentiating Apple’s products with others. Apple was always ahead of competition on all aspects/features of their products until the new 4S. To put simply the original iPod had no competition for about six years before Apple cannibalized it with iPhone. The iPhone had no credible competition for three years before the Androids ( specially Droid) showed up in late 2009 . The iPad/iPad2 had no credible competition for two years. Now Apple is under attack on the tablets.The tablet manufacturers are striking back the empire. Tablets that are 59 dollars to 200 dollar range are eating Apple’s lunch. Folks used to save money for buying Apple products. Now they don’t have to. The economy is bad and I agree with Mohan garu on the well to do customers buying Apple stuff. Apple will continue to make money but the rate at which they are growing i.e. year over year profits will decline. They can continue to make more money if the pie keeps becoming bigger. But that’s not going to happen. Even if it did, the bigger pie will shared among the cheaper tablet makers.
      Apple stock will have a reality check once Amazon launches the Kindle Fire. They got to go down , sometime and me thinks the time has come.

      • I think it will be based on combination of how the economy doing and how the market looks at Apple, in the long run.In a tougher economy it is the market share that matters. It is the same kind of thing (history) repeating where, as soon as Apple innovated something, a lot of cheaper alternatives mushrooming just like the way PCs drubbed early Macs. If Apple has learnt anything from history, they should come up with cheaper versions to stay ahead and my strong suspicion is that they did learn something. Look at iPod, it still has the $49 shuffle! My bet is that Apple will come up with cheaper versions of tablets.

        As I said before, patent law suits and anti-trust cases might play a role too.

      • Bhanu Prakash garu,
        We are waiting for your article on Android 4 & Samsung Nexus (compare to iPhone 4S).