The case for selling Apple

After the tech giant's astonishing fourth-quarter results, how could its stock possibly be a 'sell'?

By Stock Traders Daily Feb 28, 2012 2:37PM

Image: Stock market Bear (© Hemera Technologies/Jupiterimages)In a nearly unabated fashion, shares of Apple (AAPL) have continued to charge higher to new all-time levels following its blow-out fourth-quarter results.


Without question, it is the most-adored stock by investors and the darling of Wall Street. So, a roll of the eyes is the typical reaction when the rare pundit or analyst does come out with a negative opinion on AAPL. However, as we discuss here, there is a legitimate bearish argument, other than just "the stock has run too far, too fast."


Apple's fourth-quarter results were indeed astonishing. All of its primary products -- iPhones, iPads, and Macs -- easily outperformed expectations. In fact, during the fourth quarter, it became the world's largest smartphone maker, with roughly a 24% share. Looking ahead, the tech giant also has key launches in the pipeline, including the iPad 3 and the next version of the iPhone. There is little doubt that the company will continue to sell its devices at a mind-numbing pace, and that consumers will continue to line-up at its stores when the latest versions launch.


So, with that said, many are probably wondering how AAPL could possibly be a "sell." There are three primary issues that need to be considered. The first of which is less important, and is more of a short-term concern. The other two, however, could have longer-term ramifications for the company and the stock.


The first issue has to do with the euphoria that still envelops the company following its much-celebrated fourth-quarter results. It would be foolish to discount its phenomenal quarter, but there is a very important point to be made. A good portion of its sales come from vendors such as Verizon (VZ) and Sprint (S). In an effort to meet anticipated consumer-demand, Sprint in particular loaded up on iPhones to the point that it overstocked by a wide margin. In fact, the carrier spent about $20 billion on the devices and now holds a glut of inventory. Clearly, it will take several quarters just to work through this inventory, so investors shouldn’t expect a repeat purchase of that magnitude anytime soon.


The more pressing concerns, however, have broader implications for the company and its future. For instance, it is rather amazing that AAPL shares barely blinked following the passing of Steve Jobs -- the company's true visionary. Yes, Jobs left behind a road map for the company to follow, along with perhaps the "next big thing" (Apple TV), but the company cannot replace the image, and marketing genius that he emanated. He said it best himself: "I create products that people don’t even know they want." Is there anybody at Apple now who possesses that ability?


The truth is, Apple is a company that is completely consumer-driven, and consumers have flocked to it largely because of its brand identity. Jobs was the ultimate purveyor of this "cool" image. The problem now is that, with Jobs gone, the company loses that innovative mind and that absolutely crucial marketing talent, and the competitive environment is becoming more and more difficult. Google's (GOOG) Android operating system is capable of providing essentially the same functionality of an iPhone, and these devices are not as expensive.


Finally, there is the law of large numbers. It seems highly improbable that Apple can continue this rate of growth, especially given the increasing competition and the fact that emerging markets are slowing down. In a recent article, Gartner Research predicted that global smartphone sales volume will slow to 39% from the 58% we saw last year. Combine this with the probability that Apple won't be able to squeeze out much more in terms of margins, due to economies of scale being mostly played out, and the case can be made that AAPL is starting to look like a "sell" -- maybe even, dare I say, shortable.

 

15Comments
Feb 28, 2012 3:06PM
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Here, just off the top of my head (simply because I don't have the time right now to really get into it) are my 3 reasons why this article is way off;

 

    1.  iPad

    2.  China

    3.  Enterprise

 

This company is barely scratching the surface in all the above (and more).

And don't take #3 with the grain of salt that most bashers do.

Also, I can't believe 2 out of your three justifications for selling:

 

    1.  Law of Large Numbers - Apple bashers' favorite but lame reason to bail.

    2.  Steve Jobs' death - Tim Cook may be better at this than the late genius.

 

Just 2 cents worth from a fanboy, take it for what it's worth.

 

   

Feb 28, 2012 9:32PM
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Blah Blah Blah. Some idiot writes one of these articles every time Apple hits the next high. You sell your shares because I need to buy some more. See you at $700.
Feb 28, 2012 7:54PM
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the case for selling apple - insanity
Feb 28, 2012 9:44PM
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 In an effort to meet anticipated consumer-demand, Sprint in particular loaded up on iPhones to the point that it overstocked by a wide margin. In fact, the carrier spent about $20 billion on the devices and now holds a glut of inventory.

I work for a company that sells Sprint and they are not over stocked.  When the product launched, Sprint gave us 16 iphones, and we have over 20 stores.  To date they are still running out of inventory weekly.  Their "incredible sales" could've been better if they had more product.  The iphone 5 will crush everything prior.

 

Feb 28, 2012 3:35PM
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From WSJ...
"Sprint Chief Executive Dan Hesse told Sprint's board in August that the carrier would have to agree to purchase the iphones over the next four years - a commitment of $20 billion at current rates... (or 30.5 million phones)".

Inventory glut? ... "several quarters to work through"... really?

Feb 28, 2012 9:08PM
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are you kidding me???? people are waiting for iphones.....i got mine in december and they were still sold out..how can verizon be overstocked????
Feb 28, 2012 9:05PM
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So, "Riddle Me This", why is Priceline with a forward P/E of 21, a BUY, and Apple with only a forward P/E of 11 a SELL??????
Feb 28, 2012 10:10PM
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AAPL has just two leading products in a consumer electronics industry which has proven time and time again to be one of the most fickle. It also has a market cap the size of ExxonMobil. Hmm. That’s got the little voice inside my head asking, “If I buy now at this price, who’s going to buy it from me?” I wish I had listened to that little voice when it was asking me the same question about the house I bought back in 2006. Maybe I would feel differently if I had decided to pay $750 for an Ipad last month instead of $199 for a Kindle Fire.

Feb 28, 2012 9:08PM
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it has had a nice run up over the last year...  kinda hard not to take some profit and pocket it...
Feb 28, 2012 9:23PM
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It's the carrier, not the device that's the reason for the overstock situation. 
Feb 28, 2012 10:26PM
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once it becomes the darling,it is very hard to predict the top,the top might be reached when the first carrier balks at paying the freight for the phone,making apple subsidize its own phone,or ATT finally wises up and dumps randall stevenson,for he alone stands as the guy that gave apple its run,he signed the first deal that allowed apple to not have to subsidize its pahone that subsidy was bourne by the att,...I belive these numbers are accurate,since the first day of the IPHONE ATT'S stock has fallen by 38%,and apples has flourished ,it is has been one of the bigest wealth transfers in stock market history,selling phones at huge numbers isn't helping the carriers bottom line....so I forsee down the road that one of these carriers will tell apple no more...on a side note I have been in a ATT store several times in the last couple of weeks,and unlike in the past they do not ask you if you are interested in an IPHONE if anything they seem to be steering you away ,and pushing other phones..watch out it might get tricky looking for that top
Feb 28, 2012 5:52PM
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It all depends on how long pepole keep buying their overpriced Toys and how well Win dows 8 works.
Feb 29, 2012 10:52AM
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Sad Wow! USA takes takes takes and then gives gives gives. USA is saying come and get it. They are printing money from nowhere.
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