Dissecting an Apple Bear

From my AAPL 4Q11 recap posted last night:

"Earnings misses are not the end of the world.  They can be healthy, serving as a foundation for further gains. Misses act as a reset for increasingly lofty expectations. Problems arise though when people look for answers to an earnings miss and are quick to make incorrect assumptions…. Apple bears are getting louder. People are wondering. People are asking.”

It wasn’t too hard to find an Apple bear (or a “trader” with provocative thought questions as they often want to be thought of) with a good list of questions for AAPL shareholders. Today it’s courtesy of Doug Kass writing for the Street. I think his questions are a good summary of the main bearish arguments that are being floated against Apple.

(my comments in bold). 

Kass: If I were an Apple shareholder, I would be asking myself the following eight questions this morning (I don’t have the answers, and I didn’t have the foresight to buy the shares at lower levels!):

• Valuation is rarely a market catalyst. Who doesn’t know that Apple’s valuation, excluding its cash position, appears inexpensive?

Since when was Apple’s valuation looked at as a catalyst for the shares? I actually have Apple’s P/E multiple declining through 2013.  If you ask me; iPhone, iPad, iOS, and Apple management & culture isn’t too shabby of a catalyst list. 

• In reading the analysts’ earnings post mortem and explanation of why the company missed on the bottom line, why is it only now so obvious to analysts that Apple has been impacted by iPhone purchase deferrals ahead of the introduction of the iPhone 4S? Why wasn’t that included in analysts’ estimates?

My post from last night pretty much answers this question. We still don’t know how people buy phones.  

• In my few decades of investing experience, when companies cite the impact of weather, seasonality or product transitions (as was the case with Apple) as reasons for a profit miss, it is usually a sign of a company’s maturing (sales and earnings) growth cycle. Have we seen a peak in growth rates at Apple, and beyond the quarter catch-up, might we begin to see decelerating growth at Apple in 2012-2014?

If Apple actually missed its guidance, this question would make a lot more sense. 

• Size matters. Should investors be surprised that, with annual revenue having risen (fiscal 2011 September year just completed) to over $108 billion, sales and profit growth will become more difficult going forward? Fiscal 2014 sales are projected to approach $200 billion. Have the outlook and expectations for Apple grown too optimistic?

Is he suggesting to buy smaller companies with weaker fundamentals because they have a smaller market capitalization? 

• A 3 million unit shortfall in iPhone sales and slightly weaker iPad numbers (11.1 million vs. consensus of 11.6 million, but there were estimates for 13 million units!) resulted in the profit miss. Are investors overestimating the short-term growth prospects for the overall tablet market? And what about the weakening trend in iPod unit sales (down 27% year over year) that signal a secular decline in the product category? Doesn’t this place more pressure on the success of future new products?

His iPad question, addressed in my piece last night, contains some validity, however, its funny that these same people will then tout how other tablets - without an Apple logo -  will do just fine.  If the tablet market is not as big as initially thought (11 million iPads/quarter doesn’t seem too small to me), that doesn’t just spell trouble for Apple, it will mean Amazon, Google, and any other player looking to actually gain a footing in tablets will have a tough time. 

• Apple’s corporate and product success are well known. Are these success too well known as manifested in a near unanimity of bullishness on the part of Wall Street’s sell side?

Is he suggesting to buy a company with more corporate and product failures because less people will be bullish on the stock?

• The ownership of Apple shares is broad, and institutional sentiment toward the company appears to be approaching a positive extreme. One could argue that the long side in Apple is crowded. Doesn’t everyone own the stock? Who will be the next investor in Apple’s shares that will catapult the valuation and shares toward the next and higher level)?

I thought everyone who wanted to own Apple already owned shares back at $250? Institutional owners aren’t allowed to add to their positions?

• Most recognize that Steve Jobs has already thought about and has contributed to another few years of new product innovation. But will the miss last night revive the issue whether the remarkable disruptive innovation instituted by Jobs (in the past) can be continued into the future after his imprint is removed?

Would this question have been asked if analysts’ expectations weren’t high and Apple instead blew consensus numbers out of the park?

Doug Kass did a good job at asking the obvious bearish questions, from a traders’ perspective. There is a bear argument to be made for every company (including Apple), but Kass’s arguments are largely irrelevant, focused on short-term stock movements.  The actual long-term Apple bear argument centers around the scenario where Apple products become stale (see RIMM) and people begin to move away from iOS, iPhones and iPads. Additional Apple problems would center around conflict within Apple’s management team post Steve Jobs or post Tim Cook.  

The best part about this post is I am only writing it - answering these bearish AAPL questions - because Apple is executing on all cylinders.