Why The Apple Inc. Sell-Off Is Just Getting Started
Keith Fitz-Gerald: I’ve made the case several times that Apple Inc. (NASDAQ:AAPL) was over-cooked, most recently last fall when the company was flirting with $700 a share.
Each time I did I was taken to the woodshed by the legions of Apple fans who couldn’t reconcile their passion with their profits.
iHere we go again…
Following earnings that “beat” and revenue that fell short, the company dropped $48 billion, or roughly 10%, in afterhours trading on Wednesday. And still more on Thursday in early trading.
I think this is just the beginning of a protracted sell- off and my argument really isn’t that fancy. In fact, it comes down to two very simple points:
- The iPhone isn’t the only game in town;
- The iPad isn’t the only tablet, either.
Competition is heating up around the planet and that’s leading to significant margin compression in Apple’s product set. Even if the Street has not yet recognized this explicitly, I think that it’s only a matter of time before it does.
I know Apple’s just beaten the Street yet again, at least when it comes to earnings ($13.07 billion versus $13.06 billion a year ago), and that revenue increased 18% to $54.51 billion versus $46.33 billion a year ago.
But, so what. Get A Free Trend Analysis For Apple Shares Here!
No business – I don’t care how hyped or how rabid the customer base is – can escape the inevitable impact on margins and revenue that comes from higher competition, higher costs and fickle consumers who are less and less enamored with all things “i” every quarter.
Component costs are already high and getting higher. Growth is stalling. It’s “over owned,” to borrow a phrase from DoubleLine CEO Jefffrey Gundlach, who believes like I do that the stock will trade lower this quarter. His target is $425 while mine is a bit lower at $400 and change.
According Bloomberg, Wednesday’s numbers were the slowest growth figures Apple has posted in 14 quarters.
The Apple Double Whammy
Like other manufacturing concerns, the double whammy means that the ongoing margins associated with each new Apple product are becoming smaller. Over time, of course, those go down as production lines ramp up and economies of scale come into effect, but that’s really a short-term game. Apple cannot perpetually introduce products with rising costs and reasonably expect the markets to absorb them as fast as they once did.
If costs are rising faster than revenues over time, sooner or later the two flip and earnings get nailed. There’s not a company in the world that can escape this eventuality.
Additionally, CEO Tim Cook is finding out the hard way that Steve Jobs’ business model really doesn’t account for much absent Jobs himself. Coming into Wednesday’s announcement, t he company had missed estimates for 3 of the past 5 quarters. Now, this makes 4 for 6.
Apple has changed. When Jobs ran the place, it oozed innovation. Now, it oozes MBAs and it risks the same sort of “deadening” process that has plagued Microsoft (Nasdaq:MSFT) since Steve Ballmer took over.