7 reasons Apple is more doomed than you think

Henry Blodget says the stock is a 'buy,' but he's wrong.

By Forbes Digital Apr 18, 2013 3:21PM
The Apple Inc. logo is displayed on the back of the new MacBook Pro David Paul Morris/Bloomberg via Getty ImagesBy Peter Cohan 

Apple (AAPL) was in the news for losing its rank for a time on Wednesday as the most valuable publicly traded U.S. stock. And now Henry Blodget -- who first became famous for the gap between his bullish reports on tech stocks and his bearish emails about them -- is touting seven reasons why Apple is a buy.

But I think all those reasons are wrong and the stock has further to fall.

Apple fell $23 a share -- dipping below $400 on April 17.  According to Bloomberg, one of its audio-chip suppliers, Cirrus Logic (CRUS), produced too much inventory -- which analysts concluded meant that iPhone sales could fall short of analysts' expectations.

Vernon Essi, Jr., an analyst at Needham & Co., wrote in a research report, "We blame Apple for losing its mobility mojo. This was simply an inventory overbuild for the iPhone 5 relative to Apple’s forecast."

But this has not stopped Henry Blodget's Business Insider from arguing that investors should buy Apple shares. According to the SEC, in 2000, Blodget issued a very bullish analyst report while at Merrill Lynch on a company called 24/7. The next day, he wrote an email claiming the company was "a pos [piece of shit]." This helped get him banned from the securities industry.

And now Blodget is touting Apple as a buy -- citing seven reasons. Here's why I think his argument does not hold water.

1. The stock is expensive
Blodget argues that Apple stock is cheap since he claims it trades at a price-to-earnings (P/E) ratio of nine -- less than the market average of 15. Moreover, he argues that if Apple just keeps generating cash at the rate of $40 billion a year, an investor could buy the company today for $390 billion, pocket its $150 billion of cash and just wait six years to get Apple's business "free and clear, for nothing."

But both of these arguments only make sense if the assumptions about Apple's future financial performance are correct. For example, if you believe that a stock is cheap when its P/E is less than its earnings growth, then Apple is very expensive. That's because its earnings shrank at a 17% rate in the first quarter of 2013 and are expected to fall nearly 1% for all of 2013. Nor is it clear how these trends will yield $40 billion a year in cash flow.

2. Apple has nothing new in the pipeline
Blodget writes that "excitement should begin to build about the iPhone 5S, the new iPad Mini." He admits that these products are nothing new. Moreover, based on the bored reaction from my students last fall to the iPhone 5's announcement, many may shrug should Apple release these "new" versions of old products.

Many will conclude that there is no compelling reason to replace their current iPhones. Or, perhaps they will buy the latest offerings from Samsung and other Android makers.

3. Without Steve Jobs, Apple can't innovate
Blodget argues that the team that helped Steve Jobs introduce new products is still at Apple. The absence of innovative products from Apple since Jobs died is compelling proof that his team is not able to take over. In fact, the fiasco with Apple Maps shows that the team can do harm -- rather than merely fail to innovate. 

4. Cheaper iPhone marks end of Apple's leadership
Blodget argues that a cheaper iPhone is in the works and that's good for Apple shareholders. But if Apple goes ahead with that cheaper version, its margins will shrink and that will mean further profit declines.

And it signals an end to Apple's differentiation strategy -- it made better products for big existing markets like MP3 players, smart phones, and tablets -- that caused Apple's appeal to investors and customers to soar.

Moreover, it is highly unlikely that Apple -- with its enormous fixed costs including a $5 billion headquarters complex under construction in Cupertino -- will be able to win as the industry's low cost producer.

5. Betting on lower expectations not a good strategy
Blodget argues that a terrible earnings outlook for Apple will be good news for Apple investors because it will be easier for Apple to beat diminished expectations. This could be true if Apple comes up with a way to accelerate earnings growth. Meanwhile, Blodget omits offering a price at which investors should buy based on that argument.

6. New TV or wristwatch won't revive Apple's growth
Blodget suggests the possibility that Apple could be working on a "revolutionary new product like a TV or smartwatch that will suddenly get people jazzed." Even if Steve Jobs were still running Apple, I would be skeptical that people would pay a huge price premium to replace their existing TVs or buy a watch when they are already carrying a smart phone that tells them the time.

7. Apple not well-positioned strategically
Blodget argues that Apple is well-positioned strategically. Yet he says that Apple "has lost its product edge and clung too long to its super-premium pricing strategy."

He then suggests that Apple should abandon that strategy to become "both the quality leader AND the price leader."

Unfortunately for investors, his recommendation would cause Apple’s net income to shrink even further. Under Jobs, Apple was a differentiator -- for example, people paid a 44% premium for the iPhone 4s, yielding a 71% gross margin. 

Since Apple has lost its ability to do that, Blodget thinks it can now offer the lowest prices in the industry and still make money. That only works if Apple can also lower its costs below those of all its competitors.

If you buy Blodget's argument on Apple, maybe you can buy the Brooklyn Bridge from him, too.

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17Comments
Apr 18, 2013 3:36PM
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Looking at item 1, how can Apple be "very expensive" if its PEG ratio is less than 1?
Apr 18, 2013 4:27PM
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Ya back in Sept I called Apple to trend lower, and here we are.  Guess what, I was not alone.  This seems to be a self fulfilling prophecy here as while I admit this company has not performed as well as in the past it still brings in huge profits and has more cash on it's balance sheet then most companies are even worth.  I was right the stock would go lower but the company is far from doomed.
Apr 18, 2013 8:13PM
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By any fundamental valuation method, Apple is cheap.  If you look at P/E, PEG, EPS growth, balance sheet, debt, product line, or just about anything else, Apple is cheaper than any of its peers.  Just compare Apple's numbers with those of Microsoft, Dell, HP, Oracle, IBM, Google, Facebook. The market obviously does not agree. 

Apr 18, 2013 9:50PM
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i wonder why every day, MSN (aka) the "gates boys" goes after Apple to say something bad about them. Thousands of companies around but always first page: Apple. I heard lately Windows it's moving to the vacuum cleaners industry..Well that's good because for the very first time, they will have a product that doesn't suck...
Apr 18, 2013 8:49PM
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"By any fundamental valuation method, Apple is cheap. If you look at ..."

 

When we are in uncharted territory financially, bringing up charts is just plain stupid. All the data can be massaged to read any way psychopaths want it to. The trick is to actually look out the window and say to yourself... hmmmm, we're literally one foot into the 21st Century Great Depression. I surmise that a handheld device mainly used for social networking and counter-productivity isn't going to have legs. I should probably avoid investing in it until we have an economy.

Apr 19, 2013 4:33AM
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I have never been one to be in "Love" with Apple.  I have an iPad, but not an iPhone (mobile just isn't too important to me as it comes with ridiculous fees to AT&T and such), having said all of that, Apple is one announcement from being back in the $700 range, and 1 Non-announcement from being $300.  What I mean by that is all Apple has to do is release a new great product from their ultra-secretive R&D department (such as a new TV, TV attachment, or other game changing device) and the stock will soar again.  Do I think that they will have such a product?  I have no idea, but I doubt that the creative genius was all wrapped up in one guy sitting at the very top (sorry Steve).  I anticipate that to get these great creative ideas into a tangible device takes a lot of people and many of those people are still at Apple.  Having said all of that, it they don't announce something great, they will fall the way Sony has in the post Walkman era. Premium prices in a commoditized smart phone environment will be Apple's doom.  Let’s all hope that Apple continues to provide things that people want and are willing to pay a premium for.  No one likes to spend money on commodities, but we don’t mind spending cash on diversified products that change our daily lives like most of Apple’s recent products have.

Apr 18, 2013 9:11PM
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Saying something is Cheap is indicating it can't go a ton lower. It can go a ton lower. Or it could double by year's end. That's the problem we have when Global Money Printing Presses which are running 24/7, you don't know the full extent of the fallout when the Gravy Train Ends.

Is apple trading below historical norms for a company of it's type and performance, yep. That hardly means it can't go lower. We are in uncharted territory for everything financial. We can't rely strictly on historical norms to determine the future.

It's hard to argue against Apple as a Cash generating machine. Think of how much cash they will generate from their balance sheet once interest rates normalize. One can argue that Apple will continue to have the Cult following it had when Jobs was alive. I still say it was more Myth than reality concerning his technological contributions in his latter years. Just how long will folks pay premium just to say I have a Apple product? So far so good. Next week reports will give some indication to if that might continue.



Apr 19, 2013 8:32AM
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Jobs was and for a little more time is APPLE. He has been replaced with a so so management team that has inherited some difficult political headwinds. Many folks are either too dumb or too full of themselves to not understand the importance of vision, creativity, and timing in developing new innovative products. 
Apr 18, 2013 4:01PM
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This guy is insane.  Apple is very undervalued, period. 
Apr 19, 2013 12:11AM
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Over time, most companies revert to the mean. Extended outperform is unlikely because we live and work in a competitive environment. THINK PEOPLE!
Apr 18, 2013 4:29PM
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They said the same thing 10 years ago.
Apr 18, 2013 10:06PM
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There are only a few reasons anyone ever bought an Apple anything--

1. Style -- for the folks who think this is important
2. Reliability -- many fewer problems than PC's
3. Afraid of technology
4. Supposed ease of use.
5. Better operability in the case of iPad and iPhone.

Let's start with No. 4:  While this was once a possible reason, the increased technological smarts of younger people (many of whom got a start on Apple PC's) and the latter incarnations of the PC made this no longer true.  In fact, the Apple PC's got harder to use as the software Apps increased.  If one learned on a Windows PC, it's not hard to move to later versions (with the possible exception of Windows 8).  Moving to an Apple PC after being used to Windows is not easy for most switchers, nor vice-versa (I have friends who have made the switch both ways--it takes some getting used to).
No. 5: Others have caught up, especially Samsung and Kindle.
No. 3: Not as much of a problem as 10 years ago now that younger people are familiar with tech gadgets (see above).
No. 2: Only a slight edge still exists.  I have not had any major problems in several years with WinXP/SP3 nor with Win7--I skipped Vista and Win8 doesn't seem worthwhile, just Window-dressing.
No. 1: The cachet may be slipping!?!

Net Net: Margins will likely continue to slip, although I agree that cash flow may keep up for awhile.  Nokia is a good analog.  No major tech innovations seem to be close, Apple or Microsoft or other--possible exception: Google Glass.


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