ZeroHedge reports that Ken Heeber, has nearly emptied his coffer of Apple stock: Abandon Apple Ship? Ken Heebner Dumps Almost Entire Apple Stake
In a just released 13F filing,
Ken Heebner’s Capital Growth Management has disclosed that he has
reduced his holdings in Apple almost to zero. After holding 1.15 million
AAPL shares as of June 30 (which made him holder #100 in the name
sorted by size), Ken Heebner who is a regular guest on CNBC courtesy of
his bullish tendencies, sold virtually his entire stake, leaving him
with just 111,000 shares.
I’m not going to got through a whole bunch of “I told you so’s”, but
Heebner knows how to count, and probably sees the margin writing on the
wall: A Quick Peek Into the REAL WORLD Logic That Went Into Building the BoomBustBlog Apple Model: It’s Called Compression!!! Tuesday, October 19th, 2010
Add to that the fact that he probably realizes
How Google is Looking to Cut Apple’s Margin and How the
Sell Side of Wall Street Will Enable This Without Sheeple
Investor’s Having a Clue. Of course, like me he may have seen Empirical Evidence of Android Eating Apple! After all, Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?
Heebner is not the only one reading BoomBustBlog and/or deciding to leave the Apple cult, as excerpted from the “Peek Into the REAL WORLD Logic” link above:
“The rising popularity of devices
using Google’s Android software may hurt Apple in the long term, said
Michael Obuchowski, chief investment officer of First Empire Asset
Management, which holds Apple shares. “Everyone is closing in and it’s a
huge question of how they are going to respond,” said Obuchowski,
whose firm oversees $4 billion. “I’m really worried about Apple; I’m not convinced that I’m going to hold Apple two years from now.””
“‘Commodity’ Experience
Jobs dismissed the threat of rivals. Apple’s approach of designing the
software and hardware for its devices results in a better user
experience, he said. By contrast, Google gives Android free to handset
makers including Motorola Inc. and HTC Corp., creating a “commodity” experience,
he said. “We are very committed to the integrated approach, no matter
how many times Google tries to characterize it as closed,” Jobs said.
He said Apple is outselling BlackBerry-maker RIM and he doesn’t “see
them catching up with us in the foreseeable future.””
Notice how he failed to say Apple was
outselling Android. This is material, because they were materially
outselling Android 2 and 3 quarters ago. Androids growth rate is simply
phenomenal, and its business model may prove unassailable unless Apple
makes some drastic changes (ex. allowing cloning) – changes that I
doubt management will be willing to make. Jobs also (understandably)
failed to mention that the “commodity’ Androids materially outperform
the iOS products in terms of features and functionality. This is pretty
much in direct contravention to the concept of the term “commodity”,
isn’t it???? I don’t think many Samsung Galaxy S, Droid X or HTC Evo
owners will characterize their devices as “commodities”.
“Munster, who estimated Apple would
sell 11 million iPhones, said last week that supply shortages likely
held back sales of both the smartphone and iPad. The cost of making the
iPhone may be increasing, said Andy Hargreaves, an analyst at Pacific
Crest Securities in Portland, Oregon. The device accounts for 43 percent
of Apple’s revenue [and much more of their profit!!!].
‘‘We saw what we think is a pretty remarkable increase in iPhone
costs,” and that’s fueled concern over margins, Hargreaves said in an
interview with Bloomberg Television.”
Good to know he’s been reading
BoomBustBlog. Remember, supply shortages can very well stem from
competition for suppliers and supplier’s attention. Is it Android
again??? Here’s a hint… Does the sole patent holder and sole
manufacturer of Apple’s branded IPS Retina Screen plan to become one of
the most prolific Android phone vendor’s in the world? If so, where
does that leave Apple? Margin compression!!! Or worse. Read up on your
proprietary Apple content BoombBustBlog subscribers!
“Verizon Phone – Even so, competition
is increasing. The Android operating system was the most popular
smartphone software in the U.S. in the second quarter, according to
Gartner Inc. Samsung, HTC, Motorola and Dell Inc. are among the
companies using Android in tablet computers to rival the iPad.
Hewlett-Packard Co., the largest computer maker, is developing a tablet
computer.
Apple may get a sales boost by expanding the availability of the iPhone
in the U.S. Verizon Wireless may begin selling it in January, two
people familiar with the matter said in June.”
You can bet your left nostril hairs that
the deal Verizon cut is NO WHERE near as sweet as the one AT&T gave
Apple. What does this spell? Margin COMPRESSION in the quest for wider
distribution to prevent Android (to late) from gaining critical mass
and taking over.
There’s just so many reasons for the big Apple dumpt. Of course,
there is no reason to liquidate nearly all of such a large position for
liquidity reasons unless you feel it has run its course, or worse.
Then again… What do I know?
Below is a graph showing the longer term trend of Apple market share
in the smart phone space. It illustrates the explosive growth Apple has
had through its iPhone series, and it also shows some seasonality (ex.
lull before hardware upgrade season, etc.). As you can see, the growth
trend, viewed either directly or as a moving average, shows marked
downward momentum. Of course, it is highly unreasonable to expect a
company to continue to grow at the pace that Apple has, but that is
exactly what many Apple valuation models that I have come across have –
literally hard-coded in. This is folly, in my opinion – particularly
considering the effect of the Android competition that is already
showing up. If you look closely, Apple’s smart phone market share is
already showing NEGATIVE growth!
Since I know that the chart may be a little difficult to read at the
tail end encompassing several years of data, I have taken the liberty
to drill down to the past year to get a closer look. Remember, Android
sales didn’t really get started until 8 months ago, and the big surge
didn’t occur until the Evo/Droid X/Samsung Galaxy series were launched
in June, July and August – most of which is not captured here. The same
is to be said for Apple and the iPhone 4.
Click to enlarge to printer size!
Despite increases in both the overall mobile market and more importantly, the smart phone contingent’s penetration of said market:
- Apple’s smart phone shipments are showing a negative growth trend
- and more importantly, Apple’s smart phone market share is
experiencing a very sharp downward trend as shown by both direct
observation and that of the 2 period moving average
I am bullish on certain tech companies, but I am bearish on the US
equity markets in general, as I warned in my latest Google Quarterly
opinion: 
Google Q3 2010 review for all paying subscribers (click here to subscribe):
To support a margin compression theory, the article begins by using institutional selling as proof and presents increasing Android market share as an argument. Let’s take a closer look.
1. Institutional Selling
The two examples provided (one institution selling and another expressing worry) are insufficient to support the conclusion that big money has started to dump Apple. What’s happening in the aggregate? Might other institutions have initiated positions or increased their holdings? Unless this table (http://www.nasdaq.com/asp/holdings.asp?symbol=AAPL&selected=AAPL&FormType=Institutional) is out of date (It does include Capital Growth Management’s sale.), there is no significant net change in the number of shares held by institutions.
Now, one could argue that CGM’s Heebner and FEAM’s Obuchowski are such stellar managers that their opinion warrants special attention. Well, Heebner’s CGM Focus fund is only a two-star Morningstar rated fund (http://finance.yahoo.com/q/pr?s=CGMFX+Profile). Heebner “knows how to count”, as the author writes, I suppose, but he doesn’t know how to outperform; Obuchowski’s FEAM50 (http://www.1empiream.com/FEAM50_Q3%2010.pdf) and APA125 (http://www.1empiream.com/apa.htm) funds have beaten their benchmark. However, he’s expressed concern about holding Apple two years from now. He hasn’t sold yet.
The article hence doesn’t provide either quantitative (as the number of shares held has not changed significantly) or qualitative (as no star manager is cited as selling) evidence of big money starting to dump Apple because of margin compression. For the one under performing manager cited for selling, no reason is provided. As a matter of fact, there’s no evidence for net institutional selling of Apple, period.
2. Increased Android Market Share
With a 35% profit share in 2009 (http://www.businessinsider.com/chart-of-the-day-revenue-vs-operating-pro...), the hardware industry's highest, hasn’t Apple been successful in the personal computer market? I would say so, and yet it had only captured a 7% market share. How has it accomplished this feat? By offering something different that consumers value at a premium.
The author writes: “Jobs also (understandably) failed to mention that the “commodity’ Androids materially outperform the iOS products in terms of features and functionality. This is pretty much in direct contravention to the concept of the term “commodity”, isn’t it???? I don’t think many Samsung Galaxy S, Droid X or HTC Evo owners will characterize their devices as “commodities”.”
A product’s characterization as a commodity is not a function of the quality of its features and functionality or user opinions thereof. The Android clones are commodities because there’s fundamentally little difference between them. One might have a bigger screen, another longer battery life, and yet another a thinner form factor, but they all run the same OS and hence offer the same functionality. If an innovative feature proves popular, it can quickly be duplicated. There’s little that sets one phone apart from the other. They are interchangeable. As such, they must compete on price. You might prefer the Galaxy S, but settle for a Droid if its price is sufficiently lower to sway you. Their makers will generate lower profit margins, just like Windows PC makers.
The iPhone, on the other hand, offers something different: superior aesthetics, greater ease of use, no bloatware, superior integration with related products (Mac & iPad), a certain prestige, but mainly a distinct OS. It offers the whole package. Its hardware competitors might best or equal some features, but not the whole. If you value this different product, you can only buy from Apple. By maintaining full control of the iPhone experience, Apple prevents it from becoming a commodity like all the Android clones and, so long as it’s able to produce a superior experience on the whole, ensures premium pricing and high profit margins.
The author also writes: “…its business model may prove unassailable unless Apple makes some drastic changes (ex. allowing cloning)…”
What if Apple did pursue the Google model and licensed its OS? If it allowed iOS clones, it would cannibalize its sales and its margins would be obliterated, as it would lose its main differentiator. Would it be able to keep generating a $238 profit per phone (http://www.asymco.com/2010/10/31/making-it-up-in-volume-how-to-view-unit-profitability-vs-volume-in-handsets/)? In light of the fact that Google is giving Android away, it’s highly unlikely.
Android has already won. The battle for market or unit share, that is. Apple will henceforth never sell as many phones. That’s OK because Apple will probably keep generating the lion’s share of profits (http://www.asymco.com/2010/10/30/last-quarter-apple-gained-4-unit-share-22-sales-value-share-and-48-of-profit-share/) by executing a business model proven successful with the Mac.
As it reaches critical mass, Google’s model might indeed become unassailable. No other company will beat Google at its game. Apple has chosen to play a different game that might also be unassailable. They’re two different ways to win. Google will attempt to monetize Android through market share dominance, while Apple will maintain its profit share dominance among hardware makers through innovation and differentiation. Apple’s margins will suffer significantly only if it’s unable to keep offering something different, valued at a premium by consumers.
In short, the article fails to show an institutional dump of Apple shares. It doesn’t even show that the one (marginally competent) institutional manager mentioned for selling did so because of expected margin compression. Moreover, it is misguided in using Android’s unit share dominance to deduce margin compression at Apple. Apple’s profit margin will only suffer significant compression if it fails in the execution of its business model.
To further the analysis, is Google’s licensing model superior to Apple’s integrated model, as many seem to believe? In the personal computer market, Microsoft made money by selling Windows to hardware makers. In the mobile phone market, Google is giving Android away, while planning to monetize market share dominance through services (search and others). The hurdles it faces with this model are not insignificant. Its lack of control over its OS is a liability: witness Verizon’s pre-installation of Bing on some Android phones (http://www.broadbandreports.com/shownews/Verizon-Bing-Wont-Be-Exclusive-On-All-Android-Phones-110294). Its platform is a customizable OS that hardware makers and wireless carriers can tailor to suit their own ends, which may be to Google’s detriment, and they don’t have to pay for it. Its success is far from assured. Might Google be going back to producing its own branded phone because its current strategy is proving difficult to monetize (http://www.engadget.com/2010/11/11/this-is-the-nexus-s/)?
Apple, on the other hand, is already monetizing the iPhone. As a matter of fact, it made as much money in Q3 2010 as all other phone makers combined (http://www.asymco.com/2010/10/30/last-quarter-apple-gained-4-unit-share-22-sales-value-share-and-48-of-profit-share/), in spite of commanding only 4% market share. Apple won both the unit share and profit share battle in MP3 players with the iPod, as no worthy competitor came forth. This is not the case in smart phones with the emergence of Android. Nonetheless, the Mac, with 35% of PC profit share in spite of only 7% market share, has proven that Apple’s model can thrive even in the face of strong competition.
You're a nice guy and all, you're smart too but god damn you're so fucking arrogant I can't read your research because you spend so much time patting yourself on the back in your reports. It takes far to long to get to the important and useful information.
its Apple vs Microsoft (Google) all over again, Apple is the trailblazer, making pretty inuitive computers, actually using tehcnologies others afraid of, things like multi-touch, putting it in nice package, and once Apple shows proof of concept, the software guys emulate on cheap hardware...last time MSft made money the whole way up, this time Google had to give it away for free to get market share/become the standard, but it will pay in many ways...And finally, the challenger to Msft is not Netscape, its google, and unlike an apple, a google can not be eaten....
Nice call Reggie...once again, your basic fundmental analysis wins the day...
nice techicals you offer us. thanks reggie.
nice call reggie. props.
I'm picturing Steve Jobs lying on the floor, speaking into his iGadget, "Help! My margin has fallen, and I can't get it up!"
"Caruso Cabrera's book is ranked #25,514 in Amazon because Morgan Stanley is not allowing Amazon to sell it to retail despite pent up demand"
Its #25,000 headed to #2,500.000 because she is an idiot
Where's HarryWanger?