If You Own Apple Stock, This Is What You Are Betting...

Tyler Durden's picture

Submitted by Jared Dillian, The 10th Man, via MauldinEconomics.com,

Back when I was in business school, the PC manufacturers were go-go football stocks. Bull market, dude.

There was Dell, Hewlett-Packard, Compaq, and Gateway, which used to sell its computers in a Holstein cow-pattern box. Apple was making Macs but had a much smaller market share than it does today.

Business mags like Fortune and Forbes fawned over Michael Dell—how he had achieved this “mass customization” ideal in his manufacturing process.

You could pick out what kind of processor you wanted, what kind of hard drive, what kind of monitor, plus a few other options, and your tailor-made computer showed up at your doorstep in four to five days.

Eventually, though, commoditization replaced customization, PC margins went to zero, and that was the end of that.

Today, it’s hard to imagine the PC business any other way. Nobody puts a lot of thought into what kind of PC they are going to get. They’re all the same. Now people call their PC a “box” and the PC manufacturers “box-makers.” Like, there is no value added at all.

Dell went private. HP and Compaq merged, defensively. Gateway is gone. The idea that PCs were ever a growth business for anyone is crazy… right?

And yet we have these smartphones now, extremely powerful devices that are essentially miniature computers.

If You Own Apple Stock Today…

Innovation in the smartphone business has been very rapid, though it has slowed down in recent years, and the latest changes have been incremental. Apple’s 40% margins aren’t sustainable.

On the other hand, Apple has managed to keep its margins persistently high in every product line, from iPods to iMacs to iPhones—partly because of superior design, partly because of superior marketing. They have turned the phone into a status symbol.

If you own Apple stock, you are betting that:

  • Apple will maintain or even increase its already huge market share in smartphones.
  • Nobody will ever build a better mousetrap.
  • The smartphone will resist the commoditization that has happened to pretty much every piece of technology.

Seems to me like there’s only one way for things to go right and lots of ways for things to go wrong.

 

AppleApple

I have no position and no particular axe to grind. While I don’t think the stock is especially overvalued, that doesn’t mean it can’t go down.

Besides, phones are different from computers. With the way wireless plans work in the US, people don’t bear the economic cost of the phone, at least not all at once. So the pricing pressure isn’t there like it was with PCs, which went from $2,000 to $600-$800 in the span of a few years.

But Apple has very much turned into a one-trick pony (60% of revenue comes from handsets) whose margins are perhaps not as bulletproof as we think. A $700 billion market cap rests on the existence of these margins.

The point here is, if you own this stock, directly or indirectly, to make you uncomfortable.

I probably wouldn’t short it, though. It’s hard to break an ankle jumping off a pizza box.

Clever Business Strategy—But Is It Clever Enough?

In any industry, there is usually only one Walmart. There isn’t room for two firms like that to survive.

In luxury goods, it’s different. There are 25-30 major brands of Swiss watches, and they each carve out a profitable existence.

Apple gets to have it both ways. They mass-produce a luxury good and make luxury company margins. That’s how they got a market cap of almost a trillion dollars. Very difficult to pull off. But they did it.

I have an iPhone. I have had the last few iterations, along with all the iOS updates. It is essentially the same phone. Let’s be truthful—Apple is not truly innovating at this point, just tinkering around the margins.

Staying on top is hard. But there is always the car!

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Dr. Engali's picture

On the surface I agree, however never bet against a company that .gov and the NSA have put their support behind to keep track of their sheeple.

FireBrander's picture

If you own Apple, your are betting on the Sheep continuing to be Sheep!

Just the fact the I can't replace the battery, without a major disassembly, is reason enough for me to NEVER own an iPhone...yet Apple sells a billion iPhones.

People own iPhones, well, because, other people own iPhones. How many "families of four" have spent ~$3000 getting iphones on insanely expensive contracts then used those phones to make calls, text, check email, and surf the web...tasks a $100 phone on a $30 a month plan could easily tackle.

The Apple bet, is a status symbol bet...

SoundMoney45's picture

I see the bet as Apple will find new markets for existing and new products that more than offset global market saturation and maturation in the cell phone market.  That said, Apple's iPhone chips and vertical integration are unarguably more than two years ahead of all competitors, so the competitive gap appears to be widening if anything at the moment.  

Mile's picture

Are status symbols a bad bet? I guess if that ever becomes the case, we will see the demise of Lexus, BMW, Mercedes Rolex, Prada, Channel and others. I would not bet against human nature. BTW, many of these status brands have been around forever. The brands that decide to go down market go down and then disappear. So, if Apple ever decides to go down market, then I would be scared. Also, your right betting on Sheep continuing to be Sheep, that seems like a great bet!

Bananamerican's picture

"The Apple bet, is a status symbol bet..."

you might even say it's "asspirational"

mvsjcl's picture

Absolutely correct, Doc. The Control Paradigm requires monopolies be formed; tyranny abhors "free markets."

I am a Man I am Forty's picture

Calling Reggie, Calling Reggie!!  margins aren'st sustainable, been hearing this for how many years now????

 

Come on Tyler!

Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) MrPalladium Oct 30, 2015 10:21 AM

well - do you enjoy making money?

Because if you listened to ZH - you lost it.

FireBrander's picture

"Stock up over 140% since this little gem."...because Apple will/has spent $200 BILLION buying back it's OWN stock!

Apple Expands Capital Return Program to $200 Billion

https://www.apple.com/pr/library/2015/04/27Apple-Expands-Capital-Return-...

Deus Irate's picture

Not just their own stock either, they also buy their own phones.

Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) FireBrander Oct 30, 2015 10:20 AM

which lots and lots of companies have done because of the overall global economy - right?

But its only Apple that is targeted over and over - 3 or more years of ZH being wrong on apple and acting as if any drop in stock is the beginning of the end, with ZERO reference to the rest of the sector.

Here's the thing, and others have periodically said this against the insane anti-apple herd mentality - I have *never* read any assessment based on Apple technology or that of their competitors. Not once here.

How are you assessing a tech stock with no one on staff who understands the technology?

I understand you find people who are hyperdevoted to apple irritating, just like the kids in band at school - but that's no basis to keep republishing the same 3 or 4 articles.

It begins to look both ignorant, and crazy.

I am a Man I am Forty's picture

Many folks here just hate any type of success.  Serious mexican crab disease going on here.  One tries to get out of the bucket and the others grab it and pull it back in.

jimijon's picture

I'm a developer. Apple is blowing past the competition with its strategy, tools and advancements. And blazing new fashion categories to boot.

 

I am a Man I am Forty's picture

You have a problem with a company returning capital to its shareholders?????  What the fuck is your point???  You do realize this is a good thing, right??????  You do realize outstanding shares go lower when a company buys back their stock right??  This means the value of your shares increase!!

And this also includes dividends too, you know that's cash that you get.

Good lord, some of you people need help.  

Tyrone Shoelaces's picture

I want an Android car!

 

Oldballplayer's picture

A company with that much cash on hand can "buy" innovation.

I am not afraid that apple is going anywhere any time soon.

A fucking 40% margin?  Oh my God, it might drop to 37%. 

People have the attention span of moths.

Anopheles's picture

Buy innovation?  You mean like the iwatch? It went from being sold in exclusive Apple boutiques earlier this year, to being sold in Best Buy less than 6 months later

And Apple has never revealed sales numbers.  Instead, they lump the numbers into a "miscellaneous" product category. 

 

Bunghole's picture

Commoditization of the smart phone market is already here.

The Chinese manufacturers (Xiaomi, Meizu, One Plus) are making equivalent phones in the $250-$450 range right now.

What is The Hedge's picture

One correction: The iPhone is not truly a luxury brand. Simply put, it does not carry a luxury brand price tag. Why? The average iPhone user never sees the price tag. He/she only sees a "Fee" subsidized by the carrier. Very different than other luxury brands.

Bunghole's picture

The car dealers have been doing it for years.

Lease a $100,000 Porsche for $890/month.

Somebody will step into the luxury apparel leasing line soon enough.

Need a Rolex and an Armani suit.  No sweat.  After a simple credit check and a low monthly payment of $89/month, you too can pretend to be a schmuck.

The illusion of grandeur.

Anopheles's picture

Yup.  They aren't selling a car, they're selling a monthly payment.

Over 85% of new cars are financed, and 55% of used cars. 

buzzsaw99's picture

proud owner of zero craapl bitchez

Ban KKiller's picture

Cheap mooch here....just bought brand new TWO year old phone, Nexus 5. $200.00. Not the latest, that is for sure. Replaces THREE year old LG 710. Upgrading so I can stay sort of, kind of, relevant. 

I ask iphone folks what would make them buy a new phone? What productive apps do they really use? There are no real innovations that matter....at least as far as I can tell. 

Full encryption, see you soonest! 

FireBrander's picture

Just bought an unlocked Galaxy S3 in absolute MINT condition for $99 bucks! Physically looks EXACTLY like the 4, 5 and 6 (non curved screen)...functionally, for me, works the same too...very sleek, fast phone...more than enough "features and power" for the average person.

Modern Cimmerian's picture

I hate to be that geeky guy and tell you this, but I'll do it anyway:  The S3 is a fucking awesome phone.  I have two, which my kids are using, and I have an S4.  I have them all set up the same way.

Get Cyanogenmod on your phone, use the "nightly" builds (which are extremely stable), and you will have the most up to date operating system available and tons of power.  No matter what, run AdAway or a similar program to block ads.

You will never consider getting a phone that can't be rooted or run Cyanogenmod (or other open source operating systems) once you get used to the speed and power. 

Deus Irate's picture

I won't disagree with you, but for me it's the Note 4 with the same mod. What a freaking rockit. Sometimes I fear the sheer speed and power of the thing will blip me into a different universe.

coldspring21's picture

Galaxy S3 used to be a nice phone, but why use old S3 when you can get something like Zenfone 2 for $200?  Or Xiaomi Redmi Note 2 for $160?  Both of these two phones blow Galaxy S3 (and older iphones) out of water.  That's how far Android entry level phones have come - now you can get a near flagship phone for entry level price.

Rikky's picture

the only reason i've ever owned an apple phone is my corporate network only supported it.  now they finally support android so when i'm done with the current model i'll have many more inexpesive choices to feast on.

all-priced-in's picture

"Besides, phones are different from computers. With the way wireless plans work in the US, people don’t bear the economic cost of the phone, at least not all at once. So the pricing pressure isn’t there like it was with PCs, which went from $2,000 to $600-$800 in the span of a few years."

 

Has this guy bought a new phone in the last year?

 

You buy the phone up front - or they will of course finance it - but you see the total cost - not like before when it was burried in the monthly phone bill and you got the phone for "free".

 

IMHO this will cause the replacement cycle to stretch out - want that new iPhone - that will be $800 please.

 

I think Apple will have a good Christmas (USA sales) - people will still want the bigger screen and it is worth the upgrade - after that unless they come out with something really special - they are going to see a slowdown (USA).

 

Apple will become a bet on China -

 

 

 

Anopheles's picture

Chinese sales will be mainly new customers, and not upgrades.   They won't see upgrades every 2-3 years like in the US.   Chinese phone companies are eliminating subsidies for phones.   When a phone costs a months income, they will hang on to it a lot longer than a couple years. 

And contrary to what you might think, the majority of iphones, all phones actually, are subsidized.   Just like 85% of all new cars and 55% of all used cars are financed. 

williambanzai7's picture

They all come down to Hong Kong to pay a cash premium for unlocked phones sold outside the Apple Stores. There is a purchase limit in the stores. Those who do may be borrowing from the shadow banking system, but not the Phone Co.

Meanwhile, a luxury goods maven has told me that young Chinese now consider their phone model to be their most important accoutrement for projecting face. More important than their watch.

roadlust's picture

Once the morons who didn't get a big screen because Steve Jobs didn't want big screens, finally get their big screen iphones and catch up, years later, to the Samsung phones it will be over.  After that. zzzzzzzzzz for AAPL.    If it's not moving now (with the company buying it's own stock hand over fist) it won't be moving when iphone sales expansion collapses. 

Samsung has already been suffering from "perfection fatigue."  Their phones have been so good since the S1 that there's really been no reason to "upgrade" to new models.  Once the Apple cult gets their big screen (and the economy gets worse, or they can't use the software they want on their iphone) there will be no reason to buy another iphone.  Apple will see he same stagnation as Samsung with their phones. 

The difference Samsung has a hundred products, and Apple has one.   Samsung is an actual company.  Apple is a fad.

All brands eventually lose their cult following, as fashion slaves move on to the next one.

coldspring21's picture

Calling Samsng phone a perfection since Galaxy S1 would be a streatch - but you have a point.  Lots of Samsung phone users still have older devices like S2, S3, S4 and they will not let go of it until it breaks.  Will that also happen to Apple iphone? Just looking around, there are still enormous number of iphone users still using older iphone 4/4S/5/5S who haven't upgraded to big screen, and they don't seem to suffering from shame of not having upgraded to latest iphone model.

two hoots's picture

Approaching zero knowledge market benefit.  From the old to new discoveries: earth around the sun, gravity, relativity, elec, computers, nano, space stuff, we are approaching a slowing period when markets can no longer transfer that knowledge to a beneficial product for consumer use.   That will likely pick up as everything elec replaces fossil fuels but that will take a while and so many will enter that space it will be hard to predict the winners.   We are at a point of creative stagnation, at least in the consumer market. 

Imagine this headline: " China Raids/Haults All  Apple Manufacturing Until US Stops Ship Incursions"

FireBrander's picture

"Imagine this headline: " China Raids/Haults All  Apple Manufacturing Until US Stops Ship Incursions""

That's what I would do!

If the bully you face is 200lbs while you're at 120, don't physically take him on...call his mom with some stern words, or kick him in the nuts if there's no time for phone calls. No entity can control a bully as welll as that bullys' mom...

Note: "mom" and "nuts" are synonyms for Corporate America.

Anopheles's picture

Apple has been thrashing around trying to find the "next big thing", and have been failing miserably.  Their last big thing was the ipad, over 5 years ago. 

coldspring21's picture

And Ipad has been sinking for last 7 quarters, going from over 60% to now below 20% market share.  Maybe Ipad wasn't the "next big thing"?

nazbuster's picture

I don't own Apple stock but wonder why the author totally ignored Apple Pay as a factor in his assessment of the firm....

Anopheles's picture

A niche product/service. 

Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) Anopheles Oct 30, 2015 10:24 AM

So is the watch - Even I think its dumb and over-priced... but it looks like its not the bath I feared...

china and se asia, baby.

Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) Oct 30, 2015 10:17 AM

and the apple bashing continues...

So what is the innovative and well funded and highly talented tech firm that Zerohedge advises people invest in, instead?

Zero hedge has been saying Apple was going to tank for 3 years.

When do you ask if maybe a bunch of economics majors don't know/understand the underlying tech? Because the tech matters.

Seriously.

jmc8888's picture

There isn't one.

People complain about tech slowing down, well that's because no one has been funding innovation for decades.  People also have to realize it was the gov't funding of the space program, mostly the Apollo program that allowed Apple to even form in the first place.  No Apollo program, no Apple computers.

Same thing for the entire telecommunications sector.

Since we have shut down all the science driver programs, all we have been doing is tinkering around the edges for decades.  Sure each THEME has gotten massively better, but the driver program that creates NEW themes isn't there.  Eventually themes exhaust, not to mention the lack of innovation in other areas helps create stagnation faster in these themes as well. 

Overall that's why there is stagnation.

Throw in a completely corrupt Wall Street who is just as happy shifting paper around and there is no incentive to innovate, unless innovation means financial engineering.  Which is not innovation and definitely not engineering.

As for Apple, I upgraded my non apple phone and had to since Cricket Wireless was bought out by AT&T and switching over to their network so my three+ year old phone wouldn't work.  It doesn't have the best specs, but it's got a quad core Adreno, 2GB ram, 12GB internal storage, a 6 inch screen, 4G LTE, and without any contract BS it's natural price was about $219, of course because of the switch they gave me $75 off trading in my three year old phone.   So the phone was actually under $150.  With the switch to the new network they even lowered their price to $35 a month for service.  Hell recently I've seen other carriers even hit the $30 mark.

What the article is pointing out, and it's something I've known for a long, long time naturally.  That the telecommunications companies, and the cell phone companies are driving towards an end when monthly bills are cheap... like $10-20 a month for unlimited everything, and the phones sub $100.  That the Wall Street way of dealing with this will be mergers and consolidations.  This is not a good trend for Apple, or the telecommunications industry as a whole, and mirrors what happened in PC industry.  Most of the people who want good PC's, now buy the parts off newegg or a similar online retailer and put them together.  Complete customization at a discount price.  Dumbfucks buy Alienware with the same specs for 2-3x the cost.

Similar situation to Apple.  Except while I'm sure since the phone market is bigger it will have a higher number of people overall that want to splurge on a phone, thus Apple will have a core luxury market, that's not what Apple relies upon today.  They rely on a huge mass of people, a signficant percentage of them, to want to pay (one way or another) for that luxury phone.  In the end once this takes place, the phone side of Apple, will be niche, like Alienware is to PC's.

Even right now it means the phone I've had for over half a year right now, and cost a ton less, has the main feature that most people are spending all that money for because Apple didn't want to create a 6 inch screen to begin with.   I didn't need to pay a premium price, or have anything subsudized by entering into an expensive contract.  

Of course like most people, I have friends with Apple phones.  It was hilarious the first thing they mentioned was how big the screen was and asked how much I paid for it.  Then shock and horror on their faces.  I wasn't try to get the 'in' thing.  I was forced to upgrade, and the two things I wanted in my next phone was a multi-core processor, and something around 6 inch screen. 

But there is also a theme I've heard many talk about, the diminishing returns of tech that's matured.  Well did anyone look around and ask WHY all we have is maturing tech?  Many people ignorantly think it's because we've invented all that humans can invent... or something stupid along those lines.

The events that spawned the need, and thus DRIVE to create the progenitors of what Wall Street people call 'tech firms' isn't there.  We shut it all down.  Since we did, replacement themes are few and far between.

All Steve Jobs and Woz did was figure out how to take parts off a shelf when no one else was and build a computer and business out of it.  Then Jobs took that same approach with the Ipod, Iphone, and Ipad.  He really didn't innovate, just at the margins.  What he was good at, was realizing how to take existing tech, modify it around the edges, put it in a new configuration for a purpose people would desire, and be a perfectionist so it came together well.  He also had an idea of where things were going, especially with communications, so he was trying to get these devices to work together, and the need and desire for it.

He was never really a big 'I' innovator, but a little 'i' innovator.  He was quite brilliant at it.  But he's dead, and now Apple doesn't have even that.  Instead they have Apple Watch, something even Jobs didn't want, because I'm sure he knew there wasn't a need for it.  That people were moving beyond watches, other gadgets provide a similar function, so it really didn't make much sense.  Especially since thier whole segment is paying a premium.  So yeah, asking people to pay a premium for redundant features in a form people are ditching because it's obsolete is a pretty hard sell.  But the people at Apple that replaced him, their first attempt at something new, was to create that exact product that Jobs didn't want.

Besides the timing of the event (Apple crashing) doesn't matter.  You are basically arguing that when hanging by the thread, it's more important to be right of the exact moment it breaks, in order to believe that it will break, rather then realizing that KNOWING it will break, and taking the appropriate action to be ready for WHEN it does, is the best course. 

Glass-Steagall

Christophe2's picture

You are such a dumb fuck.

Everyone on ZH knows that the markets are HUGELY manipulated by HFT and massive central bank printing, you moron.  Practically everyone here knows that the markets are horribly broken and that there is no link between value and price in these manipulated 'markets'.

So go ahead and be self-rigthteously proud about how BTFD'ers have been makin' risky money (that is actually largely lost to inflation and taxes) buying crap stocks like Apple in a fully corrupt ponzi market.

The fuckers at the Fed are still printing, the MIC is still murdering, and the slaves in China are still slaving away, so there should be a few years left of can kicking, during which you can bleet all you want about how great the value is for sheeple, and how much money you made riding that satanic wave.

FUCK OFF ALREADY, punk!

sweetwater88's picture

love your rounding process to make your point! Apple's mkt cap { $668b} is almost a Trillion. Just rounded it up by $300b. Or rounded down it might be said it is 1/2 a Trillion. Where was that business school?

zhm's picture
zhm (not verified) Oct 30, 2015 10:21 AM

So whats the point of this article? another useless ZH story. evryone knows apple builds desirable products and has hundreds of billions in the bank. i suppose ZH wants people to short it.