Time to take profits in Apple

Unless the company starts to serve third-party resellers better, it will begin to lose market share.

By MSN Money Partner Jan 6, 2012 10:16AM

Kyu Oh/Photodisc/Getty ImagesBy Thomas Kee, guest columnist

 

In all industries, across all demographics and within every business segment, one thing remains crystal clear. Businesses must serve their customers or their customers will go elsewhere. 

 

In the case of Apple (AAPL), the demise of the growth rate of what was once one of the best on the planet is happening in front of our eyes. Unless Apple starts to serve its customers better, it will begin to materially lose market share and revenue and earnings projections will come down aggressively.

 

Until now, the focus has been on the end user. But because Apple relies so heavily on third-party resellers like Verizon (VZ) and Sprint (S), both of which are feeling margin contraction and negative effects on earnings because of the extremely high cost of iPhones, the real customers are third-party resellers. As long as margins and earnings are negatively affected by sales of Apple's products, those resellers will look for alternatives and eventually find them. Nothing could be clearer.

 

Apple’s products were revolutionary. They have changed the way most of us communicate, and we will never forget Steve Jobs for being the innovator that he was. But nothing in Apple's arsenal is compelling enough to command multiples as high as recent growth rates. Wall Street already sees this coming. 

 

In addition, Apple is starting to look for recurring revenue streams in the cloud, which has characteristics similar to the service model that has kept IBM (IBM) in good standing throughout all recent market turmoil. But everyone knows IBM is just a slow-growing giant now.

 

Notwithstanding a complete failure on the part of Apple executives to continue to offer top-level products, I am not suggesting that Apple is going to fall into peril. But the easy money has already been made. The company's high-growth phase is behind it, and the struggles of the retail market are starting to come home to even this once seemingly unbreakable retail giant. Apple's confident attitude may be getting it into trouble, because it is asking too much from enterprise-level clients.

 

After a while, selling a $500 slight upgrade to consumers who are strapped for cash will not produce the same results. That is just the beginning. With stiff competition from all other handset makers, the wireless carriers of the world will also favor other options. They will offer incentives to customers to buy phones that add to their bottom lines instead of impairing them. The iPhones may bring customers in the door, so the carriers won’t ever stop selling them, but once customers are attentive, they will push other, sometimes even more innovative products.

 

It you own AAPL and you are expecting the company to grow like it has in the past, you are sorely mistaken. Apple is not what it was. The competitive landscape has already caught up with the company, which is not respecting clients' needs. Until such time as this changes, Apple is a sell. Look for single digit P/E multiples in 2012.

 

Thomas Kee is the president and CEO of Stock Traders Daily, the founder of The Investment Rate and the author of "Buy and Hold is Dead." He has never owned Apple shares.

17Comments
Jan 6, 2012 10:43AM
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It is hard to believe your lack of understanding of Apple, its products, and the nature of its market segment.  I hope you will revisit your "conclusions" and opinions after the next couple of earnings.  Apple's story is just beginning.  As part of on organization that has over $50million invested in Apple, we certainly would never turn to your organization for advice.  You are so wrong, it is almost laughable.  Actually it is laughable, but don't believe me, wait 6-months or longer and then revisit your article.

Jan 6, 2012 11:12AM
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You clearly cannot envision anything in the future.  When the iPod was out people eventually started saying, hey its just another MP3 player, what else can Apple do?  The iPhone came out.  Ok, what else could Apple possibly do?  Blam, iPad comes out.  Now you are sitting here running your mouth about what else apple can do.

And what are you talking about "not respecting the needs of their clients"?  Have you called samsung or HTC support lately?  At least with Apple, you get superior customer support, and many people are looking for just that.  

Verizons and ATTs will keep buying iPhones because that's what people want.  

The growth will be there, they release new products or improvments every year.  A kid in China doesn't care about IBM cloud services.  He just wants his shiny new iPhone.

Go short this stock some more and lose money, you loser
Jan 6, 2012 10:40AM
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Real increases just started, AAPL will place on 440 band shortly. This is just a misleading article because he just sold his AAPL stocks 2-3 weeks ago :) (I believe)
Jan 6, 2012 12:59PM
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Single digit P/E multiples in 2012??  The stock is already trading at a historically low P/E.  This is probably the single most ludicrous story about Apple I have read in a very long time.  Obviously, a short-seller.
Jan 6, 2012 12:23PM
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Thomas, your horrendous analysis explains why you're broke and trying to run a garbage investment website.  Since people like you could always use a little help, I'll give you some free of charge, unlike your website which charges 300 dollars per month.

Instead of writing moronic posts, you might want to spend more time running your complete embarrassment of a website.  Try proofreading for once.

By the way, based on your analysis how many shares of Apple did you short?

Oops.
Jan 6, 2012 12:39PM
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"  Mr. Thomas, what you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.
Jan 6, 2012 11:15AM
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This guy might have some put options or something.  This article completely ignores emerging markets and new product lines (apple TV for instance).  I do think Apples days are numbered, but realistically we have 3 years of soaring profits ahead of us, and after that a dividend to die for.
Jan 6, 2012 12:02PM
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What a load of ....! Completely ignoring markets outside the US.

I'm constantly being asked in India to bring unlocked iPhone 4S costing $900 from the US. The market for Apple products in not in the US anymore - its the rest of the world. Apple just has to make sure it stays a unique "American" company and make their products as reliable as it has been. iPhone 2G's I gave to my relatives in India are still working after 3 years!!

Nowhere in the world does anyone proudly display their Samsung or Nexus or whatever phone and say "Look what I got" - as they do with Apple products.

PS. I dont own any Apple stock or have any relationship with the company other than loving its products!
Jan 6, 2012 12:11PM
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What money manager has never owned any stock in Apple?  Mr. Kee is a sore loser with a "L".  He probably has been long RIMM all these years.  Apple has been and will continue to be a leader.  People buy Apple because it is Apple.  Apple has a very loyal customer base that are enamored by the Apple mystique.  I will take my double digit profits and upcoming dividend thank you very much.
Jan 6, 2012 11:05AM
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"In the case of Apple, the demise of the growth rate of what was once one of the best on the planet is happening in front of our eyes."

Please cite your data showing this "demise".

"So long as margins and earnings are negatively impacted by sales of Apple’s products, those resellers will look for alternatives and eventually they will find them. "

Utter tripe. Because of the way telecom companies sell phones, thru subsidy, initial sales will result in a net outflow, which they recoup over the life of the customer contract. If Verizon and Sprint were truly impacted, they would not have struck the deals they did this past year.

Further, both Verizon and Sprint know that not offering the iPhone will result in smartphone share loss. That's why they both struck deals in the past year, and specifically cited that reason.

"But nothing in AAPL’s arsenal is compelling enough to command multiples that are as high as recent growth rates"

What "multiples" are you talking about? Apple's PE is very modest relative to the S&P500, at 15. Its PE, net of cash, is about 11.5. Its forward PE, net of cash, might be as low as 8.

Why are you comparing Apple's cloud efforts to IBM's? It'd be more relevant to compare it to Amazon's and Google's. They're just "slow growing giant"s too.

"the easy money has already been made. The high growth phase of the company is now behind it and the struggles of the retail market are starting to come home "

This mantra has been repeated ad nauseum since the advent of the iPod.

"once the customer is attentive they will incentivize other, sometimes even more innovative, products."

How does that make sense. You are arguing that carriers will try to sell phones that make them greater profit. It'll be pure chance whether that phone is also the "more innovative". How is that in the customer's best interests (to buy a phone that is more profitable for the carrier)?

"It you own AAPL and you are expecting the company to grow like it has in the past, you are sorely mistaken. "

In 2 and a half weeks, we'll see that you don't know what you are talking about. Apple's guidance last quarter was the highest beyond the prior year's numbers ever. They are poised to grow just as fast as last year and the year before.

" Look for single digit P/E multiples in 2012."

Apple may indeed have "single digit P/E multiples in 2012", as I have pointed out above, they are trading at forward PEs, net of cash, of 8, but that has NOTHING to do with how Apple treats carriers. Apple knows, unlike you, that the true customer is the end-user, not the middleman.
Jan 6, 2012 11:01AM
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There always has to be contrary opinion.  You can make a case for anything in either direction and have a 50/50 shot at being right,  it's the nature of the beast. Rock on AAPL.
Jan 6, 2012 3:56PM
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Single digit PE ratio?  I can agree with some of what you say but a single digit P/E ratio for Apple is just crazy talk.  Apple growth may well slow but the mulitple doesn't price in much growth as it is.  A single digit PE ration prices in negative growth at today's interest rates. 
Jan 6, 2012 3:29PM
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Competition  will make Apple a better company. They will come back in the near future.
Jan 9, 2012 8:57AM
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Mr. Kee, Did you fall down and bump your head?
Jan 6, 2012 3:05PM
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iCore there are only so many fanboys. Apple's days at the top of the heap are closer to ending. Just like Exxon, just like Walmart, just like Microsoft, just like Intel, just like GE.

Get over it, or lose your shirt.
Jan 6, 2012 12:03PM
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In reply to "AgainstGovernmentWaste" : Droid OS is just a replacement of what every other crappy OS they were using before. Droid OS doesn't have a big future, developers still choose Appstore besides Droid Market. Of course Droid OS share is increased, because it replaced every other custom made OS on other competitive mobile phones. But let me tell you this; nobody likes a another new phone each month, that's why Samsung, LG and Droid OS will fail. They have an unorganized marketing that confuses consumers.

Apple products are pricey that's correct but that doesn't mean that Apple will lose profit and Steve Jobs is not the only inventor or future predictor on the planet. Next big thing that you can do is to review your comments :)
Jan 6, 2012 12:40PM
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@AgainsGovernmentWas​te

First of learn how to speak, you have a brain of kid in adult body.

I am not going to learn how to read numbers from you, what I am telling is the fact that you will be forced to accept in 1-2 years.

Samsung is using stolen Apple GUI and techs, you know that right? You are just a FAN BOY idiot. Read some comparisons of IOS and Droid OS development features and then come here.

I never used Macs, not a fan of Apple and will never use Macs. I am always proud of Windows on power user workstations. What I am only talking about is Apple's share on mobile phones, you can't even get that. 

Do you want to evaluate yourself with me? Check my votes and yours, little bit and get some "How to train my open source mind" guides.
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