Red flags and roadblocks for Apple investors
There's a fascinating discussion underway on The Mac Observer's Apple Finance Board — one of my favorite places for tracking the sentiments of Apple (AAPL) investors.
The participants on AFB tend to be bullish on Apple and long the stock, but they're smart investors and have good antennae for anything that could affect their holdings — up or down. So I was interested to see how they would respond when a member who calls himself (or herself) "lumi" opened a new thread early this morning with these questions:
What are the chief potential stumbling blocks, things that *could* either delay or derail AAPL's projected growth trajectory? What events would be red flags or precursors to correction or erosion?
The early responders have taken the challenge seriously, as they usually do on AFB, and offered answers that are quite insightful. The most interesting so far was posted by Alexis W. Cabot, an investor based in Rome. With his permission, I quote it in full:
Steve Jobs continued leadership of the company is still essential. We all know how his idea of what works and what doesn't permeates the decision thinking process at Apple, but Apple must learn to do without him, otherwise it will not be a great company. General Electric has done a great job at creating internal leaders that are excellent managers and have kept the company at the top of corporate America for a century. Apple must have it's own management creation process in place.
Corporate hubris. Signs that the company starts believing it can do no wrong and that customers will buy anything they produce will be when the company has peaked. Apple went through this phase in the late 1980's and we all know how that ended. Apple's insistence on revenue sharing with the networks just to sell a Jesus Phone would be nice for us shareholders, but there is a wider world out there that has laws against such restrictions on trade. I hope that Apple/SJ doesn't shoot itself in the foot if it insists too much on these revenue sharing deals.
Inability to build lasting partnerships. As SJ himself said at All Things Digital that Apple has to learn how to make better partnerships. Never has Apple needed more content and networking partners than before. It needs to work with music and movie companies, with it's own set of histrionics, and then with the highly regulated and staid cell-phone networks.
Souring US relations with China and the rest of the world. A trade war between the incumbent superpower and the aspiring one are likely to derail Apple's (and most of corporate America) growth. It will be more expensive to outsource and then sell to China, which has one of the most rapidly growing and homogeneous middle classes of the world. Given the poor job the US has done in managing its international relations, this is a growing possibility. (link)
You can follow the discussion on AFB. It starts here.
UPDATE: This topic is still going strong on the Apple Finance Board, and includes some remarks that were ported over from the comments here. Below the fold, a summary by "lumi" of the first day's posts.
Risk: Economic recession, lower P/E, reduced discretionary spending
Potential negative: AAPL shares pulled down with other stocks, fewer people buying Apple products
Counter: Growth is the crack of Wall Street and may be rewarded in any market (Gartman says buy only AAPL, RIMM, and GOOG right now, Cramer says pay up to double the growth rate on a forward PE for great stocks with good prospects), betting against the consumer is a risky play itself
Risk: iPhone revenue sharing model breaks
Potential negative: Restructured earnings projections
Counter: Higher prices for non-contract, non-locked iPhones offset losses, rev sharing isn't yet fully factored into share price at this time anyway
Risk: Future/increased iPod competition
Potential negative: Dwindling market share
Counter: An old and ongoing fear that has yet to bear fruit, Apple innovation has continued to strengthen the product line and further differentiate it from competitors
Risk: Lack of 3rd party developers for iPhone hamper appeal
Potential negative: Growth limited by competing open platforms
Counter: Third-party SDK coming in early 2008, web apps may catch on
Risk: Mac unit sales growth could top out
Potential negative: Moderating market share growth may signal a top
Counter: Available evidence is quite to the contrary
Risk: EU and international store openings too slow
Potential negative: Competitors may thrive before Apple gets foothold
Counter: More about missed opportunity than short-term risk, stores are indeed opening worldwide at a manageable pace (quality v. quantity)
Risk: Studios, content developers hold back from iTunes
Potential negative: Less content = less utility for AppleTV, iPod and iPhone, competing services/models gain momentum in the meantime
Counter: Content is not the only consumer consideration, UI, content delivery, hardware integration and existing installed base are key drivers, too
Risk: Steve Jobs may not always lead the company
Potential negative: Loss of iconic figure, key leadership, perceived crisis
Counter: Apple is developing/grooming future leaders, corp culture of innovation is bigger than one person and this strength will power future Apple products, Jobs is in the defining moment of his career (again) and isn't going anywhere anytime soon
Risk: Corporate hubris
Potential negative: Overlook competitors, consumer desires
Counter: Company has evolved, Jobs learned lessons last time around and is unlikely to repeat them, current evidence about customer satisfaction, buzz, demand all indicate Apple continues to foster interest and loyalty
Risk: Apple doesn't play well with others (partnerships)
Potential negative: Isolation, viewed as niche player
Counter: AT&T, O2, T Mobile, Orange, Starbucks, Best Buy, etc., once again — Jobs learned this lesson the first time around
Risk: Souring U.S. – China relations
Potential negative: Huge potential market closed, production difficulties, etc.
Counter: Too much interdependence to allow for such a breakdown between the two countries, even if possible it's surely not imminent
Risk: International/Asian disrespect for IP, patents, trademarks
Potential negative: Innovation unprotected from global copycats
Counter: True innovators always a step ahead, Redmond's photocopiers produced enhancements but still led to Vista
There are some key exceptions (economy, China, legal issues), but most risks identified thus far are largely dependent upon Apple and its execution — which has been quite improved in recent years. That gives me comfort concerning many of these potential pitfalls.
Good stuff. What else? (link)
This holiday season boils down to one thing… The iPhone. IPod sales are a sure thing. Computer sales have increased and have tons of room for growth, but that's not what I am most concerned with as an investor at this point.
The iPhone is the new flag ship product from Apple. I have never seem so much hype for a product before and on the reverse I have never seen a product attacked by so many people before. I get asked all of the time about my iPhone. "Is that a new iPhone? I heard they have had a lot of problems with those, is that true?" That shows me that the negative spin has had an effect on people that don't actually own an iPhone. We already know that the vast majority of people that own an iPhone think it the best thing since sliced bread.
The bottom line will be the bottom line when the next quarter results come out after the Holiday sales season. Will the negative spinning media such as this site have an effect on iPhone sales or not?
It is quite to me that objective of this article is am attempt to change sentiment on AAPL from bullish to bearish.
It goes without saying (or should) that no stock is going to hold up in a bearish market. If the economy heads south then most products and services will suffer as a result.
One only has to do a little "due diligence" on Apple to see the truth. I consider the initial comments in the article hyperbole, an attempt to scare investors.
AAPL is speculation piled on speculation. The only thing that is more a house of cards is the IPCC report on global warming.
as a mac user and investor since 1995 i can say this stock has been very very good to me! when my first mac a performa 6200 did not speak to me when i gave it voice commands one letter to apple and they upgraded me to a 6400 at no charge. Over the years i have had little problems and apple has gotten better and better at handling them (i no longer need to write a letter to get stuff done). There is a reason users love their macs! All of mine still work (all 6 of them). As for the Poster who thinks my oil bill will stop me from buying a mac all i can say is my mac makes me about 120 thousand dollars a year and only part of that comes from my day job where i open files the pc's in the office can't "see" on a daily basis and generally save the boss's cookies. The mac community is smart and value conscious. We depend on our computers too much to trust our creative lives to a box that used the cheapest junk it can throw together to undersell the guy next door. Yes steve jobs is essential to the company because he understands what creative people do all day long and knows how to set up a system that knows what we probably want to do and provides 4 or five ways for us to do that first. My razor phone for instance thinks when i flip it on the first thing i want is the ability to buy a ringtone not my address book. that center "go buy stuff" button makes me do 2 annoying clicks to get my address list open. the entire pc experience is like being stranded in a bus station. germs viruses panhandlers con men half-ware, upgrades to nowhere and subscription renewals galore. none of which i deal with on my mac. Active "c" code or not i get more work done on my mac than the rest of the office. pc people are getting a taste of the mac experience with their pods and their phones and trying the mac out and yes it runs windows if you want to. my rules for investing in a company start with two things #1 did they get any money out of my personal pocket and #2 is there buzz about their product. #3 is the stuff they make a part of my life that i could not do with out. Apple wins on all 3 criteria. the sour grapes and spurious arguments of pc users and pundits are as tired today as they ever were. there are no mac viruses because its too hard to write one and if you subtract all the pcs that sit on desks entering insurance accident data and making change at Macdonald's you will find that he mac has a much bigger and important slice of the real user "personal" computer base than gross numbers would indicate. you don't need a mac to open up your cash register Jobs is not interested in that market he is selling filet mignon he has no need to jump in line with the hot dog vendors, as far as partner loyalty goes comp us and p.c. Richard's and even sears were partners that screwed mac sales up. incentives caused floor salesmen to steer customers away from the macs they were left with out balls in the mice or not even booted up in a dismal corner to help these self serving sales people get their 20 dollar beige box bonuses, the answer was the apple stores which has been a boon to the company's visibility. They are always packed while other mall stores are ghost towns.motorola promised faster g5 chips and could not deliver so apple went to intel they were as loyal to motorola as they could be but motorola felt its chip line was good enough to run cars and household gadgets and did not put in as much r&d as they needed to to keep us happy. apple is going to a place in a few years where you will be sitting in your living room answering the phone on your tv and having a 2 way picture conversation with your grandmother all wirelessly integrated handshaked and networked out of the box and there are a lot of grandmas in china i'm buying more apple stock tomorrow. investors consider this . if i can afford only one present for my kid this year it will probably be an apple product.if things get bad cash will be king and using it wisely in tough times will make apple even more money.
Microsoft has taken the PC industry by un-ethical means. It kills the competition by all means. Either it bought over the technology it gave a run for the competitors. Apple is the only company that could stand Microsoft's monopoly.
Definitely Apple will have a good time as it has all the technology that Microsoft has been focusing on and lost ground. Further Microsoft has been hitting the wall after the news that Bill Gates will be leaving the company from its day to day operations. Vista is a technical failure even though Microsoft is trying to cover it.
Apple is doing well in the new frontiers – Apple is starting to get accepted as a 'business' friendly computer.
Let's see AAPL crack double digits in PC market share before conceding "40%" to them. And Ashley is a typical Apple fan-girl. Blathering on about "new paradigms" and the "buying habits of millenials". There are no new paradigms in investing dear. That's the same crap that previous generation was pushing during the tech bubble in 2000. And last I checked, the millenials are far behind the boomers and Gen-X in terms of the wealth they control. The poster who pointed out that AAPL is a consumer discretionary company is dead right. As soon as the economy slows and discretionary spending declines, so will AAPL's growth tracjectory and the stock will plummet. AAPL is priced for perfection – the lemmings will flee en masse with the first quarterly earnings miss.
How short AAPL is Fortune and TWX? Let the truth surface. Remember journalism covered with self interest is false untruthful thinking. Here, this article, smacks of I/m jealous, I don't have, they do, I want" Well sometimes, one needs to hear too bad. Take your toys and go home. AAPL is too well positioned, has a strong pipeline, and genually holds well with the mementum. Try a Mac, you'll be glad you did. Plus in an Ipod, you too will say more, or simply call someone – you can be connected!
From a technical perspective, Apple's reliance on Objective-C as its primary language will hinder Mac OS X software development much like C# has hindered .Net.
All these concerns are insignificant. The biggest roadblock is that Apple won't be able to go past %40 market share in personal computers. Until then, it is smooth sailing. The main role of iPod, iPhone, iLife, iWork and whatever else is coming is to expand the Apple's personal computer market share. Apple decided ten year ago that it cannot wait and beg and pay developers to expand the Macintosh ecosystem. There are some great developers like the Omni Group who help make Mac OS the computing platform of choice. There are others who care more about having "a lead role in a cage" than a "walk-on part in a …"
Doubting and / or Shorting AAPL has proven to be hazardous to financial health. Take a look at MULTI YEAR charts……. Last PM 11-21-07 , PBS's Nightly Business Report's weekly guest financial panelist recommended AAPL as a strong buy at current prices. Predicted a $200 price level .
Its all about " supply and demand " ..
What are some of the stumbling blocks in getting PED fired?
I can tell you one, he deletes any posting that he doesn't like and points out his shortcomings.
As a software developer trying to port my software to Mac OS X, and encountering diffulties, I would add Apple needs to significantly improve it's porting tools to bring apps from Windows to Mac OS X.
Getting more apps (many more) on the Mac OS X platform is critical as the Apple tries to grow the installed base.
A complete re-write of an app into Apple's dev environment called Cocoa is extremely costly.
Here is my point in the format used by he author.
"Underinvestment in tools needed to move applications from the Windows platform to Mac OS X:
There are virtually no automated tools available from Apple to quicky port apps from the Microsoft platform to Mac OS X. To take one example, Apple makes a bare minimum effort to support tools like wxpython (a widely used GUI development toolkit). It still does not work properly after years of development on Mac OS X. Without thousands of bew apps in the pipeline, the adoption rate of Mac OS X could stall."
From text book perspective, I think these are very good well thought out commennts, However, these influences of course would impact any company around the world.
TO Kevin, Fountain Hills:
I guess the investors buying for religious fervor aren't concerned with the facts… i.e. continued beating/exceeding revenue estimates, tons of cash reserves, putting that money into R&D, continued top market share of MP3/Mobile content, continued increases of computer market share, relative early success of entering mobile phone market.
Yeah, seems like a stock that has little fact-based strengths behind it's price. Try not to provide your opinions of stocks that people should/should not be considering.
ALL of these comments come from a serious lack of info about the TMO site. If you have the slightest curiosity about AAPL and technology and market relationships there is no more informing place to go. As for this not being the right time to get into AAPL, I would ask just when in the last five years was the wrong time? What a free world the internet is. Such pronouncements, with no backup are confidently presented as sage wisdom. Past results are a pretty accurate prediction of future events. Happy Turkey Day.
The one single most important thing eveyone seems to mis or ignore…Apple is a consumer discresionary company. They make products that people want but do not need. A gigantic slump in consumers ability to consume will have profound effects on even the mighty aapl. When forced to chose between heating oil and an IPhone, I do not think it takes much cranial muscle power to figure out what the choice will be. Appl is priced for perfection in a growing economy with hordes of flush consumers all eager to possess something they make. Take away the resources and the eagarness will vanish and the mighty aapl will be no more.
I’m consistently stunned by this column’s ability to appear balanced and earnestly curious about Apple and yet relentlessly inject FUD into the headlines or simi-conclusions always to poison the public’s understanding of Apple. These latest four reasons to doubt Apple (although quoted from elsewhere) show how little poison is left in the bottle. All but one are vague musings and the one real possibility is an equal threat to every tech company. Before we look at them, let’s add the other wild speculation that Apple faces:
A giant asteroid strike or mega-volcano could kill about a billion people, destroy infrastructure, and drop the demand for all Apple products overnight. A real threat, but affects all Apple competitors equally.
Oil could hit $200 and Apple could no longer afford to ship products in from Asian factories. Ditto, above.
MS could successfully lobby the gummint to simply outlaw ownership of iPods and any non-Windows PCs. Unlikely, since conservatives like Rush Limbaugh are long term Mac users and, I gather, Karl Rove likes his iPhone.
So let’s move on to the BIG THREATS in the article:
The primacy of Steve Jobs. An issue, but Apple’s success lies mostly in the existence of a New Buying Paradigm within the 70+ million Millennial consumers. Jobs understands this and Microsoft doesn’t. Apple’s products, policies and appeal fit what buyers want and most other organizations insist on believing they can rely on traditional advertising to deceive the market.
Apple hubris. The traditional marketing gurus continue to hope for this to become an issue, but hope is not a strategy and while Apple can certainly screw up (anyone can) they have a lot of bounce ability. Apple appeal is not so much a trend soon to die out, but a meme with sufficient appeal to reshape values. iPod anyone?
Inability to build lasting partnerships. Sorry, New World Order and New Buying Paradigm are both happening at once. When traditionalists (like MS) praise partnerships they really mean controllable buffer states around the core of their empires kept in line by Imperial shock troops and a good enough share of local taxes to motivate the puppet leaders to keep the peasants in line.
No partnership of the willing buggy whip manufacturers, horse breeders and cart builders could have kept the personal transportation industry alive in the face of the railroads and auto manufactures. The same kind of shift is going on now. Apple just happens to be in front of the wave.
Traditionalist organizations, both Microsoft, music subscription services, etc., have shifted from a western capitalist business model of competitive selling to an “entitlement” model that picks every customer’s pocket every week. Windows is not an innovative platform or a business tool, it is an involuntary tax on the act of being in business. Both temporarily underemployed Millennials and increasingly self-employed boomers now know that you can “just say no” to the MS Tax and still be happy. Doesn’t Apple do this too? Sort of, but Apple offers a voluntary “club membership dues” approach. Consumers want to be where Apple is, and is going. The Vista experience should clearly show that MS doesn’t get this.
China. This is the real credible threat and the author correctly notes it would whack Apple’s competitors and customers as well. However, it seems that even managers who understand the power of the Chinese factories, don’t really understand. In the New World Order, if something can be built at all, it can be built by the millions within a few weeks. MI5 and the CIA could not have built an iPhone for James Bond and Jack Ryan at any price even ten years ago. Yet anyone with $399 + an AT&T plan can buy an iPhone in ten minutes.
Has anyone noticed that MS Windows versions require new hardware to run at all but OS X releases make older hardware run better? If the supply of new systems was interrupted overnight, virtually no one could consider installing Vista on an old machine, but millions of installed Macs could run recent copies of OS X if they wanted to.
What the doom scenarios miss is that while the buggy whip makers are grouching about the mistakes that Apple is sure to make. there are a zillion other product-function spaces that can enjoy the same lift but no one is looking to fill them.
Consider this. Where is the traffic accident likely to happen? Within the mass of cars swerving to get past the car in front of them so they can then cut another driver off to pass someone else, while talking on their cell phones to keep their lasting partnerships with other drivers alive, or the one car that is in the lead and has an unobstructed view of the road ahead.
Clearly the lead car must fail right? Run out of gas, driver has a heart attack, engine explodes… oh yes, the bridge will be out–any hope will do so we can justify claiming that we can catch up.
Anyone who gets their investment saavy off a message board should own Mutual Funds and old gold wrist watches. I always have owned stocks based on performance and execution. I enjoy the Anal-ists who think they are God when they upgrade or downgrade stocks for their own interests. They are the same fools who troll the boards.
It is no surprise that those shorting the stock will try to develope any question to raise doubt in this company's ability to execute. How about the last three years performance, facts on results, real world. Get a life!
Insight right on! Having been in the IS industry for a lifetime I've seen Apple become endearing to a seemingly closed group of consumers/users. There is a universe of potential customers who dont understand their products and/or looking for an interface to thier world.
Excellent comments from the Rome based investor and I heartily agree. Another problem is that individual investor AAPL longs tend to buy with religious fervor not fact based. This portends a rapid cliff for price to drop off of. One sneeze and the lemming pack will run en mass. I see a perfect target for those who like to gamble with puts and/or shorting.
AAPL is not a stock that anyone should consider getting into at this point. And unless longs are independently wealthy and can suffer losses while gambling, they should consider backing away from a trough.
Got to say, your update to the article is done well.
Too bad you didn't and couldn't do it to begin with. You only have one chance to make a first impression; no do-overs here.