Apple is starting to falter, as expected
Dec. 5, 2012, 2:18 p.m. EST
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About Thomas H. Kee Jr.
Thomas H. Kee Jr. is the president and CEO of
Stock Traders Daily (dotcom), where he offers strategies and newsletters to
both institutional and individual investors, and he manages money privately for
both institutional and individual investors through Equity Logic LLC. A
specialist in technical analysis, Kee is also the founder of one of the leading,
longer-term fundamental economic and stock market indicators in history, The
Investment Rate. This proprietary tool, which is available to clients, too,
predicts major economic cycles well in advance, and has been accurate since
1900. Using his broader observations of the economy to define disciplines, Kee
has been able to accurately predict market cycles in advance using his
multi-tiered technical indicators, and that combination has kept him ahead of
the curve since starting Stock Traders Daily in January 2000.
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By Thomas H. Kee Jr.
At the end of the first quarter of 2012,
I warned
that Apple may be reaching its pinnacle-point as a business. Since
then, there have been warning signs, too, some top executives departed
from the company, and recently I heard something much more tangible to
the earnings growth that persisted throughout the year thus far.
In the first quarter, I warned that Apple was not treating its customers
right, they were gouging the service providers like Verizon, Sprint and
AT&T, and although that looks great to the bottom line and margins
initially, it also creates a divide that can become pronounced when
retail items become less favored.
My key point in the first quarter was that consumers are also fickle,
products move in and out of favor regularly, trends can turn from
popular to unpopular overnight, and if the situation presents itself
where the divide mentioned above occurs at the same time a product
starts to lose its momentum, serious problems could follow. That can
lead to changes in
analyst opinions
and impact stock price as we know.
Specifically, in situations like the one mentioned above margins could
come under even more severe pressure that what would be normal because
the retailers (service providers) will promote products that afford them
a better return and skew the percentage of sales even more than might
otherwise occur. This is the way of business. Companies attempt to earn
the most they can, it is simple capitalism, and this is part of the
problem I foresaw after the first quarter of this year.
Furthermore, as the year continued, the competition — Motorola and
Samsung specifically — have caught up and in many cases surpassed Apple.
If nothing more, competition has become fierce, so I have recently
begun to investigate using a "Random Walk" approach. I have been
visiting retailers and asking a simple question: Are you selling as many
iPhones as you did before?
Resoundingly, the answer starts the same way: “We sell a ton of
iPhones.” However, as I dig a little deeper, I also discover that the
proportion of sales are changing meaningfully. I have learned that the
percentages are changing from what used to be 75% iPhone/25% others, to
60% iPhone/40% others. Others obviously include the Droid and other
phones using Google's operating systems, and Blackberrys by Research in
Motion, but I did not go into detail about the percentages of the
others.
Whether consumers are buying a lower price-point was unclear, but it
sounded as if the level of spend was the same, but they were just opting
for something other than iPhones more often. In my opinion, this
defines a loss in momentum for the iPhone, which is the foundation of
Apple's earnings and revenue, and margins too of course. The competition
has caught up with Apple, I warned about this in the first quarter, and
we are seeing it unfold in front of our eyes now.
Beware of a company that has a divide with its retailers, especially
when their products lose momentum. What might otherwise be a slight
reduction in margins could become much worse if the retailers start to
push other products more aggressively.
Although I pulled the short I had on AAPL off when the stock broke above
$640, we transitioned to the two-times-short on the Nasdaq 100
QID
+1.45%
, which is largely influenced by AAPL, and that position is up about 10%
since then. We continue to hold this position amongst others.
I am not saying that Apple will stop selling iPhones, IPads or anything
else. I also expect them to sell quite a bit, and I expect the loyal
followers of Apple products to keep buying as much as they can, but the
momentum has shifted, I feel that Apple products are no longer cutting
edge, and unless that changes, margin pressure can cause earnings and
revenue to slow considerably and multiples to contract.
Disclosure: Mr. Kee is long QID for selected portfolios.
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