by Keith Fitz-Gerald | January 25, 2013 11:28 am
I’ve made the case several times that Apple (NASDAQ:AAPL) was over-cooked, most recently last fall when the company was flirting with $700 a share. Each time I did I was taken to the woodshed by the legions of Apple fans who couldn’t reconcile their passion with their profits.
iHere we go again…
Following earnings that “beat” and revenue that fell short, the company dropped $48 billion, or roughly 10%, in after hours trading on Wednesday. And still more on Thursday in early trading.
I think this is just the beginning of a protracted sell- off and my argument really isn’t that fancy. In fact, it comes down to two very simple points:
Competition is heating up around the planet and that’s leading to significant margin compression in Apple’s product set. Even if the Street has not yet recognized this explicitly, I think that it’s only a matter of time before it does.
I know Apple’s just beaten the Street yet again, at least when it comes to earnings ($13.07 billion versus $13.06 billion a year ago), and that revenue increased 18% to $54.51 billion versus $46.33 billion a year ago.
But, so what.
No business — I don’t care how hyped or how rabid the customer base is — can escape the inevitable impact on margins and revenue that comes from higher competition, higher costs and fickle consumers who are less and less enamored with all things “i” every quarter.
Component costs are already high and getting higher. Growth is stalling. It’s “over owned,” to borrow a phrase from DoubleLine CEO Jefffrey Gundlach, who believes like I do that the stock will trade lower this quarter. His target is $425 while mine is a bit lower at $400 and change.
According Bloomberg, Wednesday’s numbers were the slowest growth figures Apple has posted in 14 quarters.
Like other manufacturing concerns, the double whammy means that the ongoing margins associated with each new Apple product are becoming smaller. Over time, of course, those go down as production lines ramp up and economies of scale come into effect, but that’s really a short-term game. Apple cannot perpetually introduce products with rising costs and reasonably expect the markets to absorb them as fast as they once did.
If costs are rising faster than revenues over time, sooner or later the two flip and earnings get nailed. There’s not a company in the world that can escape this eventuality.
Additionally, CEO Tim Cook is finding out the hard way that Steve Jobs’ business model really doesn’t account for much absent Jobs himself. Coming into Wednesday’s announcement, the company had missed estimates for 3 of the past 5 quarters. Now, this makes 4 for 6.
Apple has changed. When Jobs ran the place, it oozed innovation. Now, it oozes MBAs and it risks the same sort of “deadening” process that has plagued Microsoft (NASDAQ:MSFT) since Steve Ballmer took over.
Then there’s the product suite itself. This time last year the hype was all about stuff that didn’t exist. Somehow, at least according to Apple anyway, the uninitiated masses were just going to fall all over themselves with mini-iPads and yet more iPhones that are comparable to offerings from other companies like Samsung (PINK:SSNLF) and Motorola (NYSE:MSI)and driven by Google’s (NASDAQ:GOOG) Android platform.
That’s part of the problem. In order to recapture what it used to be, Apple products shouldn’t be comparable to anything. They should be game changers. It’s no wonder people haven’t swarmed the stores like they used to. How many mini-anythings does anyone need?
At some point, a smart phone is a smart phone is a smart phone…until Apple makes it something else or, as the risk is now, somebody beats them to it. I’ll reserve judgment for Apple TV, but so far it, too, is just vaporware.
That depends on your perspective. Tactically speaking, Apple’s a short-term trader’s dream.
Expensive and marginable, it moves a lot. That means there’s opportunity in both directions.
If you’re one to trade earnings announcements, here’s something to consider. Birinyi Associates noted to CNBC that Apple stock has “gained 70% of the time in after hours trading on the day it reported” but 68% of the time it’s closed lower on the following day by a half a percent on average. It’s already tanked as of Wednesday, so these numbers appear pretty much worthless except as a frame of reference.
I think the more attractive price action on the short side is longer-term. I expect Apple’s shares to generally trade lower through the balance of the year.
Absent some real innovation, I believe the iPad/iPhone combination will continue to lose valuable consumer ground both in terms of appeal and utility. I see this translating into reduced product appeal that directly impacts product introduction cycles and slows revenue growth.
In that sense, the real news is not what happened this earnings cycle, but the ones that are two — even three –quarters from now, when gross margins are under real pressure.
It’s no wonder, under the circumstances, that Apple guided lower again and declined to provide a profit forecast. I think they know it, too.
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