Apple Death Knell #67 - The Faith-Based Approach to Believing Apple Is Doomed

Apple Death Knell #67It makes sense. Apple just turned in its best quarter ever, so the folks who don't get Apple feel compelled to double down, triple down, quadruple down, and quintuple down on their predictions of the company's inevitable fall.

It's one of those psychamulogical things. When beliefs are confounded by reality and facts challenge world views, many people retreat deeper into a fantasy world where those beliefs are safe. It's easier to construct a reality where one's erroneous views remain intact than to admit you're wrong and change your mind.

Religions and cults have used this to control followers for centuries (or millennia), and many politicians have instinctively grabbed onto it, too. We're seeing it with science-deniers even now. To that end, it would seem that Apple Is Doomed is becoming its own religion—it certainly requires faith in the face of facts.

Enter one Peter Cohan, a regular contributor to Forbes. He has a management consultant company. Somehow.

Anyhoo, Mr. Cohan has been on the Apple is doomed bandwagon for years. I mean, years. He's actually kind of proud of that. In "6 Reasons Apple Is Still More Doomed Than You Think"—entry #67 in the Apple Death Knell Counter—he delightedly points out some of the many times in the past when he has said Apple is doomed.

21 months ago, I countered a bullish Business Insider article about Apple. After blowing through its fourth-quarter earnings on January 27, that bullish case is looking pretty strong.

But in revisiting my column, I still see six reasons why Apple is still more doomed than you think.

Let me paraphrase: I was wrong two years ago, so let me make those same arguments again. Double down, sir! Find that safe place where your world view is safe and sound.

And he digs deep with those six reasons. In all but one case, he either ignores contradictory facts or presents a subjective opinion as reality.

Next: Peter Cohan's Foray Into Faith-Based Apple Hating

Page 2 - Peter Cohan's Foray Into Faith-Based Apple Hating


1.) He argues that Apple's stock is expensive with a high price to earnings ratio (P/E). Apple's P/E was 17.5 at the time of his writing (January 28th—it's 16.05 on Monday, February 9th), but that's only if you ignore Apple's insane cash hoard of $178 billion. If you figure that in, Apple is trading at something closer to 10.29 times earnings, making it cheap.

Peter Cohan

Peter Cohan Publicity Shot

Technically-minded investors and analysts have been arguing for years whether "Ex-Cash" P/E is a valid metric. I can't pretend to know which side has the right of it (hint: both sides are right), but arguing that Apple's stock is expensive without mentioning all that cash is an exercise in cherry picking your data.

2.) Mr. Cohan argues that smartphone average selling prices (ASP) are tumbling, and that this threatens Apple's profit. This is such an egregiously faith-based argument, I'll quote him:

Apple is becoming too dependent on one product — the iPhone. 69% of its revenues last quarter came from the iPhone — up from 56% last year. That would be great if the industry was growing faster and its prices were rising.

But smartphone industry growth is slowing. [...] And smartphone average selling prices have plunged. According to the Consumer Electronics Association, smartphone ASPs are estimated to drop 38% from $440 in 2010 to an expected $275 this year.

Here's the fact-based fly in Mr. Cohan's faith ointment: Apple's ASPs rose in the December quarter. They ROSE. They got higher! The industry's ASPs are plummeting because Apple's competition is always engaged in a race to the bottom, but Apple's ASP did the exact opposite.

It's bad enough when people make the falling-ASP argument when Apple's ASPs remain high—to make that argument when Apple's ASPs are actually going up is super fracking weird. It's bizarre.

In making this argument Mr. Cohan ignores another bit of reality. Apple's Mac ASPs are almost three times higher than PC ASPs. The PC industry is also engaged in a perpetual race to the bottom because it's the only way they can compete.

3.) In his third point, Mr. Cohan argues that Apple's margins are declining. He uses data from the September quarter to bolster his case, noting that Apple's gross margins fell from 41 percent in Q3 2011 to 39 percent in Q3 2014.

"If Apple remains heavily dependent on the iPhone in China where price cutting is rampant," he wrote, "it is difficult to make the case that Apple will restore its margins above where they were in 2011."

Of course, Apple was the number one smartphone vendor in China in the December quarter, when where sales doubled year over year. You know, those higher-ASP sales. They doubled. Directly contradicting Mr. Cohan's thesis.

And Apple's margins in that December quarter? They were 39.9 percent in 2014, up from 37.9 percent in 2013. Up. The precise opposite of Mr. Cohan's cherry-picked data. In 2012, gross margins were 38.6 percent, and in 2011, they were 44.7 percent.

To recap, Apple's gross margins in Q4 rose year-over-year and year-over-two-years. to Mr. Cohan's point, they fell compared to 2011, but that particular quarter had a number of one-time factors that made Q4 2011 an aberration. In fact, it was the best quarter Apple has ever posted by a wide margin.

But looking at that quarter with all the facts represents an inconvenient truth at odds with Mr. Cohan's faith in Apple's inevitable doom.

Next: iPads, Apple Watch, and Apple's Lack of Innovation

Page 3 - iPads, Apple Watch, and Peter Cohan's Faith in Apple's Lack of Innovation


4.) iPad sales are falling. Mr. Cohan has a point. Apple's iPad units fell year over year. Apple still makes a lot of money on them—Apple still sales a lot of iPads—but unit sales are declining, and this doesn't help Apple's bottom line.

Mr. Cohan points to increased "phablet" sales as part of the reason. Some folks are buying larger smartphones and eschewing the tablet. This also is true. But guess who benefits from that? Spoiler alert: Apple is making the iPhone 6 and 6 Plus, and Apple sold a record 74.5 million iPhones in the December quarter.

It was part of Apple's record smashing quarter. So, Apple is cannibalizing itself. Here's a news flash for Mr. Cohan. Apple has always been willing to cannibalize itself. It's one of the company's strengths.

So while Mr. Cohan has a point about iPad sales falling, this being an indication of Apple's impending doom is not backed up by the facts.

5.) Mr. Cohan believes the Apple Watch is overhyped. He's "skeptical" it will amount to much of anything.

And considering his track record on Apple, you can imagine how much credence I give his opinions on this device that hasn't even shipped yet.

Keep the faith, sir!

6.) And the crème de la crème of Mr. Cohan's tour de force of faith-based Apple hating is one of my favorite canards: Apple can no longer innovate. I've been scratching my head over this for years, but it's being trotted out with regularity again.

We saw it recently when a Harvard professor argued that people bought record numbers of iPhones in Q4 for one reason only—larger screens. Everyone knows Samsung was the innovator in the large screen department, thus Apple is now a follower.

My friend Joe Wilcox piled on with a piece along the same lines called "Apple's Core Is Rotting." It's full of the same stuff about Apple's lack of innovation.

Never mind Touch ID, Apple Pay, HealthKit, HomeKit, iOS 8, Continuity, Handoff, amazing battery performance, spectacular processor performance, Reachability, or any of the other innovations that Apple has brought to market.

Never mind Apple Watch, a brand new interface for wearables, the Taptic Engine, and completely reinventing the way wearables will work. Never mind the fact that Apple spent untold efforts to understand the need to have wearable devices cross over into these folks have any idea how much effort that has taken? Do they have any idea how hard Apple has worked on Apple Watch straps?

Apple Watch

Apple Watch

This stuff is just as innovative all the "technology" Apple has brought to market over the decades. Making wearables something real people use—which has heretofore not been the case—requires massive amounts of innovation.

And this is just the stuff we know about. Apple Pay, Touch ID, Apple Watch, and all the other things I mentioned are here now. Believing there is no more in the pipeline requires faith that would put Abraham and Job to shame.

It's weird. It's really, really weird. To look at everything that has come out of Cupertino in the last two years and conclude Apple can't innovate without Steve Jobs requires an epic mind-$%^#.

And a great deal of faith.