It’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.