Apple Death Knell #59 - Apple’s Valuation Is Unsustainable

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Apple Death Knell #59It’s well known that most of Wall Street is in love with Apple. The company is covered by some 53 analysts, making it one of the most covered companies on the planet. Of those 53 analysts, 22 have “Strong Buy” recommendations (or its equivalent), 23 have “Buy” recommendations, seven have “Hold” recommendations, and one lonely soul has a “Sell” recommendation.

Then there’s Fred Hickey. He’s not a Wall Street analyst working for an investment bank like the above-mentioned analysts, but he does publish a popular monthly investment newsletter. Mr. Hickey has proudly been, “bearish on tech for a long time,” though his newsletter is ironically called The High Tech Strategist Newsletter.

In his most recent edition, Mr. Hickey unloaded on Apple. According to Forbes, Mr. Hickey noted that he missed the boat on Apple several times when the stock was a small fraction of its current price, buying at $6 (split-adjusted) in 2001, $90 in 2009, and again at $150 in 2009. In each case, he acknowledges that he sold too soon.

If you’re new to AAPL-related news, the stock closed Thursday at $570.52, up $1.34 (+0.24 percent), on light volume of 11.8 million shares trading hands.

On the other hand, he did recently make some money on the stock, buying some puts (which are a type of option that represents a bet that a stock will go lower) when AAPL was at $640 a share. He bought those puts at $1.80 and sold them at $17.50, representing a 972 percent gain on his bet.

So hooray for him! Of course, had he held on to his $6 shares and sold today, he’d have made 9,509 percent, but that’s not the point! The point is that tech is stupid!

With that as a backdrop, Mr. Hickey offered what we are labelling Apple Death Knell #59, saying that Apple is just another consumer electronics company, that its margins can’t be sustained, that…we’ll let him tell you:

Only in hindsight (years later) will [Apple bulls] know that Apple’s $600 billion valuation could not be sustained, that Apple is a consumer product company subject to the whims of consumers. That Apple sells commodity type products: phones, PCs and PC-type products (tablets) where margins could not possibly be sustained at current levels. That its biggest customers (carriers such as Verizon and AT&T) would gladly leap at the chance to sell a competitive product that offered higher margins (lower subsidies to Apple.) That Apple’s brilliant product designer and marketer, Steve Jobs, was irreplaceable. That shipping slightly better updated products (iPhone 5, 6, 7) would not bring the same explosive growth as the introduction of whole new product categories. That the so-called Apple TV (a TV!) might be a giant bomb, but that analysts had already built its success into their target price models. Note to the Appleholics: Apple has been trying to sell (unsuccessfully) a product called Apple TV since 2006.

I could go on, but I don’t need to.

I think if you wanted to sort of encapsulate the way people who don’t understand Apple’s business model think, you couldn’t find a better example.

In particular, there’s this: “That Apple sells commodity type products: phones, PCs and PC-type products (tablets) where margins could not possibly be sustained at current levels.”

This statement betrays Mr. Hickey’s ignorance of the strengths of Apple’s whole widget model. Only Apple controls the whole widget, and that whole widget allows Apple to play by its own rules. This has been the case since 1998, when Apple introduced the iMac, and it has continued with every product the company has released since.

For most of those 15 years, we’ve heard that Apple’s margins are unsustainable, and those cries have only increased since Apple introduced the iPhone in 2007 and the iPad in 2010. Apple bears have said again and again that Apple’s margins were unsustainable, and yet Apple sustains them.

Then there’s this: “That its biggest customers (carriers such as Verizon and AT&T) would gladly leap at the chance to sell a competitive product that offered higher margins (lower subsidies to Apple.)”

He’s right, on the face of it. The carriers hate how powerful Apple is even while they love how the iPhone lowers their churn rate. All of the carriers would love to do what Mr. Hickey said, but why don’t they? Because there is no competing product that will allow them to do so.

Due to the whole widget advantage that Apple has, I don’t see this changing any time soon. To people like Mr. Hickey who don’t understand that advantage, however, it’s just a matter of time before the Android/Windows Mobile horde suddenly trumps Apple and leaves the iPhone in the dust.

One thing that Mr. Hickey got right was, “That shipping slightly better updated products (iPhone 5, 6, 7) would not bring the same explosive growth as the introduction of whole new product categories.”

Not being able to sustain the same growth rates is a far cry from tanking, though, and it will require tanking for the Apple bears to be shown as prescient. As high as Apple’s stock has climbed, its current price-to-earnings ratio is 13.88, much lower than the 23 P/E Apple had just a couple of years ago when the stock was a third of its current price. In other words, Apple’s share price has not kept pace with Apple’s earnings.

In comparison, Google’s P/E is 18.46, while Amazon’s P/E is 183.13. Seriously. Even Oracle has a P/E of 14.63.

Moving on, Mr. Hickey said, “That the so-called Apple TV (a TV!) might be a giant bomb, but that analysts had already built its success into their target price models. Note to the Appleholics: Apple has been trying to sell (unsuccessfully) a product called Apple TV since 2006.”

It’s hard to decide where to begin with this, but Mr. Hickey shows an absolute lack of understanding of some very fundamental issues about Apple with this statement. The biggest thing he is missing is Apple’s strategy of entering new markets only where it can be disruptive, as was the case with the iPod, iPhone, and iPad.

It is safe to say that if Apple releases a TV, it will disrupt the market and allow Apple to sell a high-margin product that will suck up disproportionate profits. Mr. Hickey’s statement shows that he only sees what currently is, not what could be, and Apple’s fortune has been built on what could be.

His parting shot at the Apple TV settop box is also clueless. He said that Apple has been unsuccessful at selling the Apple TV, but that’s just not accurate. Apple has consistently called the device a “hobby,” and most knowledgable Apple watchers see the device as an ongoing experiment in the living room and a precursor to some future product like the above-discussed actual TV set.

To say that Apple has been unsuccessful selling it when Apple has sold millions of the devices without trying too hard is…bizarre. Apple sold some 1.4 million of Apple TVs in the December quarter of 2011 alone.

Lastly, Mr. Hickey said that the late Steve Jobs is irreplaceable. That’s certainly true on its face, but as I said when commenting on Apple Death Knell #58, if one thinks that Steve Jobs was the bee’s knees and the key to all those great products, how can you be so quick to dismiss his ability to also build a company that can continue innovating without him?

All in all, Mr. Hickey’s dismissal of Apple is a remarkable effort at old-school, run-of-the-mill thinking. It’s so in-the-box he has mistaken the box for a whole universe.

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Comments

wab95

It?s so in-the-box he has mistaken the box for a whole universe.


And, it’s a rather small box.

Mr Hickey undoubtedly thought himself clever in his quips, perhaps even original in his ‘thinking different’ about Apple stock as an investment, but in so doing, he betrays, as you’ve adumbrated, woeful ignorance of facts that can be readily checked, so much so that his assessment comes across, not as iconoclastic, but merely out of touch.

Well spotted.

geoduck

Wab95
“adumbrated”
Nice word. I had to look it up but I’ll be working it into conversation soon.

The only thing he got right was that he did not need to go on.

CudaBoy

This Death Knell thing is getting REALLY stupid, not just vanilla stupid. So it’s NOT really a Death Knell but rather a This Guy Thinks Different but wah wah wah we’ll lump it in there. By your fuzzy crybaby whining Apple Computer DID die, you know that, right? That’s why they changed the name, get it? But I guess Apple still has a chip on it’s shoulder and needs this pathetic reinforcement albeit psychedelically meaningless.
You DON’T dismiss Steve Jobs as a sustaining creative, business and spiritual force in the future of Apple? What are you smoking, I want some. Stock market?...yeah right.
After the world is saturated with these little phones and pads, what makes you think the ENTIRE market won’t dry up? Where is your data showing ANY company - Sony, IBM, General Motors sooner or later NOT to arc lower?
Sorry to be so snarky but I’m a long time Apple Computer owner and as such I can’t stand this phony chest pumping specially now that Apple is doing quite well (primarily with “toys”). That plus my stupid BR-8 recorder is acting up - I suppose it’s “adumbrate”.  Sorry. d:)

Mikuro

Saying Apple can’t sustain its current phenomenal success isn’t much of a death knell.

He seems to assume that nobody except Steve Jobs can drive innovation, and because of that, the iPhone 5, 6, 7 will be lackluster incremental updates.

While I agree that this is possible, and cause for concern, I see it more as an outside chance than the likely scenario. Could be wrong, though.

Bryan Chaffin

Sorry you feel that way, Cuda.

The point of the ADKC is to track people that say Apple is going to die or fail, and people who say that various Apple product lines are going to die or fail.  It turns out that people still say these things, and thus we still track it. Seems pretty simple to me.

As for Mr. Hickey, at the root of his comments is that Apple’s whole widget model is not sustainable. That’s obviously a Death Knell to me.

Steve Jobs: You should probably reread what I said, as well as the column I linked to.

World Becoming Saturated with iDevices: Your point is not rooted in reality. The world is saturated with computers, but they still sell. Most phones that sell aren’t iPhones, thus Apple can grow anyway. We are so far from market saturation of iPads, it doesn’t bear discussing.

But even if your point was valid, Apple’s job will be to disrupt some other market. If it can’t, it will contract. If it can, it will grow.

Show Me The Data: Show me your data that says I have ever maintained that Apple can never fall. I’ve actually said repeatedly that even Apple’s fortunes will be cyclical. The question is when that cycle will run its course, and in my opinion, the current bears are way, way, way, off.

Even if they weren’t off, we’d still track the Death Knells. My analysis of those Death Knells might be different, but we’d still track them.

I don’t run these things to thump my chest, and I don’t think Apple needs defending any more. I run them to track them and to analyze what’s being said.

I hope you get your BR-8 working again! GL. smile

CudaBoy

The point of the ADKC is to track people that say Apple is going to die or fail, and people who say that various Apple product lines are going to die or fail.  It turns out that people still say these things, and thus we still track it. Seems pretty simple to me.

I hear you Bry, but this guy is pointing out the obvious, not necessarily a Death Knell worthy rating.
Obviously Steve had the cajones to fail with certain timing (pads n tabs 1st time around!) or product. I think he learned AND he built up so much bank to allow him in the future to float a dud or two notwithstanding his general knack for figuring out “what we want” before we want it.
In fact - if I could go out on a limb the next Knell worthy subject as far as a product would be the Apple TV. I’m thinking unless that baby has Siri built in plus motion detection GUI AND touch screen AND 3 genies that pop out and cook for you that it will “fail”. Samsung seems to have set the early standard for that type of TV, but if this is the last product Steve had any say about I HOPE it will amaze. Having said that, what is the market for TV’s what with a gazillion panels out there? Will Apple TV make me sell my widget enabled 56"3D LED TV?  The BR-8 kicks ass, I was just punning!! D:)

adamC

It’s funny that anyone who talked rot about Apple always claimed to be a fanboy and even the liar mike daisey said he is one.

ctopher

I think all y’all are crazy. smile

Apple didn’t disrupt the MP3 player market. They just made it easier.

I disagree that the Apple TV has to be completely different than a typical Samsung, Sony or LG. In fact, I would venture a guess that the TV itself will have *fewer* features, not more.

The first iPod didn’t have any features that weren’t available in any other hard-drive based player. And iTunes wasn’t all that at the beginning.

But the whole widget approach grew from the tighter integration of iTunes and then the music store. (Remember at the beginning, iTunes was known for ripping and managing).

Ease of use and simplicity was the early watchwords. The critics called it “dumbing down” but the consumers said, “great, I don’t have to be a computer wiz to use it.” Thus, the walled garden was planted.

So prepare to be disappointed in the features of the new products (iPhone 4s anybody?) and then be prepared for Apple to evolve the experience. Don’t expect to be blown away. Be prepared to be assimilated!

DesDizzy

Am suprised that you didn’t include this now infamous prediction from fashionable management CC;

Innovation: Why did Clayton Christensen’s theories fail to predict iPhone’s success?
In June 2007, Clayton Christensen claimed the iPhone would likely be a failure because existing industry players are heavily motivated to beat it

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