Why I Still Wouldn’t Buy Apple

Posted on Forbes.com

I have been asked by various people, including financial television, to give an update on my view of the stock of Apple AAPL -1.57%. I participated in a recent ‘bull-bear’ debate on CNBC (March 21, 2014). But these are very short segments. Let me further explain my comments.

I will preface this by saying that I always separate my stock analysis from my opinion of a company’s products. I was bullish on Apple for several years. The stock made an important top on Sept. 21, 2012 at $705. On September 26, I turned bearish and said the stock had probably made a ‘historic top.’ Before I give an update, let me give a brief summary of my past Apple forecasts:

Six days after the Sept. 21, 2012 top I wrote on Twitter: #AAPL: price target is $520 for 2013. Top is in place. Firm needs another genius, but he won’t be found. Samsung will be the champ.

That target was hit on Nov. 16, 2012. On that day, I predicted a rally to $581 in our Smarte Trader service for short-term traders was reached. It actually hit $589 before turning down again.

I then predicted a plunge to $422. That was hit on March 4, 2013.

On February 27, 2013, in an interview on China TV-America, I said that Apple would see a “3 in front of its price.” That day Apple was at $450. On April 19, Apple broke down to a low of $385.

On April 23, 2013, with Apple at $407, I stated on CNBC-ASIA that an upcoming rally could take the stock to $501, based on technical analysis. (The closing high on that rally was $507.)

I wrote two articles during that time for Forbes.com about why I wouldn’t purchase Apple stock:  Seven Reasons Why I Wouldn’t Own Apple Stock Now on Dec.5, 2012 and Six Reasons Why I Still Wouldn’t Own Apple Stock on Jan. 15, 2013. You must always differentiate between the stock and the firm. You may love some of the products, but investing is different from liking some gadgets.

Now the stock is in the low $500’s. Some big hedge fund managers took large positions in the stock, some at higher prices. One called it a “no brainer.” Since that time, the stock has declined. Now these hedge fund guys are sitting with several billion dollars in a stock that’s declining, has declining market share in sales, has only a small increase in total sales, and declining profit margins. The hedge fund managers’ dilemma: how do you exit such a stock?

One very smart hedge fund manager tried to coerce Apple to do a $150 billion stock buyback. That would have been his “exit” strategy. But Apple can’t do that. About 64% of its sales are international and the profits have piled up abroad. For Apple to do such a large buyback it would either have to repatriate those earnings, paying a huge amount of taxes, or borrow the money. Neither seems attractive to the CEO.

When Warren Buffett invests for the long term, he looks at management. I do the same. Management is so much more important than the widgets the company makes. At Apple, the management changed when Steve Jobs passed away. Therefore, it’s foolish to look at Apple’s history under Steve Jobs. He is no longer there. Every product currently sold by Apple was developed under Steve Jobs.

Current management is production oriented, there is no creativity. It doesn’t listen to its customers. There are so many simple enhancements customers have asked for, such as a USB port on the iPad. But Apple says, “we know better.”

The Apple bulls tell us about the great “eco-system” of Apple. In other words, the millions of people who are locked into this ‘gulag’ because it is not compatible with other brands. Well, Sony had that with Betamax, Wang had it with word processors, Digital Equipment had it with corporate computers. The last two I mentioned went out of business, and Betamax died although the technology was superior to VHS. The corporate graveyard is full of such companies.

Sony used to be the top brand in electronics. But then it always delivered products with fewer features at a much higher price. The company thought it could get away with that because it was  “Sony.” Isn’t that what Apple is doing? Now Sony is just another brand, having trouble making a profit. The eco-system faded.

I made my escape from the “Apple Gulag” 18 months ago. People are fleeing the eco-system in droves. Just look at the numbers. At one time, Apple had a monopoly on smartphones. No longer. Eco-systems can die easily when alternatives come out.

Closed systems, like the ones named above, always lose out to open systems. Sony didn’t license Betamax, but VHS was licensed to others. Apple’s OS for computers is far superior to Windows. But its market share is tiny. Apple should license its technology and designs, especially now that people are looking for an alternative to the horrible Windows 8. The Apple OS could easily get 50% market share instead of the current 12% in computers.

Under the current CEO of Apple, there has not been any major product advancement. Each product is a disappointment. The last iPhone just featured different colored shells. The gold-colored shell got all the publicity because there was little else to brag about.

The fingerprint sensor of that phone has been on some laptop computers for well over one year. The next version, iPhone 6S, is said to feature different sizes. Well, Samsung has done that for two years.

Let’s look at some numbers:

Declining market share: Android share of the global smartphone operating system market increased from 69.0% in 2012 to 78.6% in 2013. At that rate, Android will soon have 90% of the global smart phone market.

Declining profit margin: At one time, the profit margin was around 74%. Now it is about half that. In the fourth quarter it dropped to 37% from 40% the prior year. Profit margins will continue to diminish as more and more alternatives appear from competitors at much lower prices. Competitors now have an easy target: a company that doesn’t listen to its customers and won’t cut prices because they are used to running a monopoly. They can’t get used to having competition. It is “Apple.”

Declining profits: Bloomberg reported in March:  Year-over-year, Apple has seen its bottom line shrink from $41.7B USD to $37.0B USD despite an increase in revenues from $156.5B USD to $170.9B USD. That means profits declined while total sales increased only by 9%.

China: The bulls have talked for the past three years about the great sales surge the iPhone will have when finally a Chinese carrier will offer it. Now Apple has such a deal with China Mobile. But the iPhone 5S sells for between $860 and $1,120 in China, the iPhone 5C between $730 and $860, and the iPhone 4S at $535. Only 27% of the smartphones sold in China sell at above $500.

Ask yourself, how many iPhones would sell in the U.S., where consumer income is much higher, at a price of $1,000?

Apple has 85,000 employees. What do all these people do? Apple has a market cap just 17% higher than Google, but Google has about half as many employees, and many more profit centers.

The CEO: For me, the greatest clue as to the vision of current management is this statement from the CEO, who believes very much in man-made “global warming.” He said that shareholders who don’t like his company’s stance on ‘global warming’ should “get out of the stock.” That’s the only advice I would ever take from him.

A good CEO should never let his belief in dubious science rule his corporate agenda.

To me, his statement suggests that if someone at Apple comes up with a great idea, but the CEO determines that it might cause “global warming,” or be bad for the environment, the company would not develop the product. Perhaps he thinks that larger tablets are bad for the environment. Who knows? Would you want a pseudo-science zealot heading up your company?

For me, declining profits, declining profit margins, declining market share, and small increases in sales are all the reasons to sell a stock, not to buy it. Never confuse the product you like with the stock of the company.

Conclusion: I still wouldn’t by Apple stock as long as current top management is in charge.

Bert Dohmen, Founder
Dohmen Capital Research, Inc.