Our Apple Short Idea is 10% in the Money – More Apple Stock Cracks Revealed

While Apple has killed many Technology Companies through stunning product innovation and super marketing, our view of the current stock price of Apple is that it is overpriced. Technology stocks cannot be valued based on traditional financial ratios such as P/E,P/S etc. For buying and selling technology stocks, you have to understand the technology industry and its trends. Otherwise you could see massive stocks losses, just ask Nokia and RIMM investor in the mobile phones or Dell / HP investors in the PC industry.

Apple killed the Leaders of the Smartphone Industry

The introduction of the Apple smartphone was a major game change in the Technology Industry with the whole existing ecosystem undergoing a fundamental realignment. The once dominant Nokia with a 40% global marketshare of the mobile phone market has been continuously declining as can be seen in its share price. Despite numerous restructurings, management and strategy changes, nothing seems to work against the onslaught of Apple and Android. HTC, the first Taiwanese company to manage to break through the OEM mold of its fellow companies, is facing the music as well. HTC which had managed to quickly gain marketshare in the smartphone market is following behind Samsung and Apple. The company has been reducing its revenue and profit targets quite frequently as it fails to compete against the emerging duopoly of Samsung and Apple. Note others like Research in Motion are now facing survival questions as well while the iconic Motorola has been gobbled up by Google. HTC is not only facing problems in products but is also facing a patent war unleashed by Apple and Nokia. Note one of the reasons for Google to buy Motorola was to add to its arsenal of mobile patents as Apple and Nokia started court cases against Android vendors in most developed countries. Though Samsung is being able to put up a good fight, HTC is not managing as well because of its limited size.

 
Now Apple is killing the Wintel Duopoly

The spectacular rise of Tablets led by Apple’s iPad has once again revolutionized the Technology markets just like the iconic iPhone has completely changed the paradigm of the mobile phone market. While we have already chronicled the demise of the established mobile companies like Nokia (read below), here we show you step by step how the PC market and its leaders Intel, Microsoft and HP are getting killed by Apple’s game changing iPad and its Android clones.

Apple is now down 10% from $665

Apple has dropped around 10% from the $665 level when we gave the idea of selling the stock. This is despite Apple having won a $1 billion patent lawsuit against Samsung and launching iPhone 5. We think that Apple is a short even at these lower levels despite the advent of iPad Mini. The reason is that the Technology Industry is hypercompetitive and for a company to boast of a market valuation that Apple has is very difficult.

Here are more Cracks that are appearing in the Apple Stock

i) iPhone 5 was a Flop in my View

There was massive media hoopla over the announcement of Apple’s new iPhone upgrade to iPhone 5 with the global mass media going into hysteria and top news headlines even the Google news in India screaming about iPhone 5 reviews. However the iPhone 5 has not come out with any new feature that seems compelling enough. In fact after the radical new touchscreen technology, Apple has failed to come out with a game changing technology for the mobile phone space. The new features for the iPhone 5 over iPhone 4 released a year ago are:

1. Apple iPhone 5 adds fifth row of icons to home screen

2. Apple iPhone 5 weighs 20 percent lighter than iPhone 4S

3. Apple to distribute the new iPhone all over the world faster than ever

4. Apple iPhone 5 has same width but taller screen

5. Apple says new A6 chip is 2x faster CPU, 2x faster graphics.

ii) Apple Management is making more Mistakes – Map Blunder

Apple Inc.’s move to replace Google mapping software with its own on its mobile devices sparked a world-wide consumer backlash, marking a rare strategic blunder by a company more accustomed to rave reviews from users.

iii) Not being aggressive enough in growth markets like India

Apple is not being aggressive enough in the world’s second largest market for mobile phones. In India it is hard to buy an iPhone because Apple has a non existent distribution network with only 2-3 resellers in some of the biggest cities in the world. Apple has virtually ceded the Indian market to Samsung which is dominant across all categories of smartphones in India followed by local Indian companies like Micromax.

iv) Apple is ceding the entire mid range smartphone market to Samsung

Apple’s strength is that its sells mostly a single product across product lines such as iPhone in mobile phones and iPad in the tablet segment. This simplicity is also its weakness since customers in an unequal world can’t covered with one size fits all strategy. This is particularly important in emerging markets where the volumes are large but not everyone can afford the premium pricing of Apple products. Samsung has by its ability to feature a number of smartphones across price points managed to capture the majority marketshare leaving Apple behind.

Our Earlier Article on Short Apple.

While I am not sure of the timing, I think its a good level to short the stock. The primary reasons are:

 a) Sell Side and Buy Side Heavily Long – Almost all sell side analysts and there are tons of them, who are bullish on the stock. Hundreds of hedge funds and mutual funds are also long on Apple. Of the 50 sell side ratings, over 90% of the analysts have rated it a Buy.

b) Competition – The competition in the technology industry is intense and can dramatically change the dynamics in a very short period of time. Look at how quickly companies like Palm, Motorola and others have been consolidated. There are numerous competitors of Apple that are continuously popping up in surprising places.

c) Peak Margins – The prices of competitive phones and tablets are much lower and their features are rapidly converging with Apple products. The recent launch of the Google tablet and acquisition of Motorola by Google indicates that the Apple-Google war is heating up. Apple will have to decrease the prices of its products eventually to compete with other products. It has mostly saturated the market for premium products.

d) Android is gaining marketshare rapidly in smartphones – Android is the most used smartphone operating system now and has gained marketshare rapidly. Being Free, is one of the most powerful competitive advantages it has.

e) Patent Battles with Samsung, Google, HTC are not going to help – Apple is fighting a lone battle against the numerous companies in the “Android group”.  At best it can hope for a stalemate.

f) Valuation is rich – When measured in standard ratios like P/E and P/CF, Apple might not look expensive, but the stock is valued richly compared to normalized ratios.

g) Steve Jobs is no longer there – Almost everyone agrees that the current management does not measure up to Steve Jobs. Its difficult to see how Apple can continue to roll out blockbuster products like the iPod, iPhone and iPad without the genius of Jobs.

h) Size is an issue – The massive size of the company and all the ills it brings like bureaucracy etc. make it difficult for Apple to grow rapidly. The huge size of Apple makes it difficult for it to grow rapidly.