I’m thinking of shorting Apple

Apple’s Phil Schiller has cause to be defensive

“Can’t innovate anymore, my ass!”

Apple’s head of marketing, Phil Schiller, came across a little defensive in his speech at Macworld this year. I can see why he might feel that way. For the last decade, Apple set the pace when it comes to consumer electronic gizmos, but now, its competitors are closing in.

In fact, I think Apple’s glory days could be over.

Don’t get me wrong – Apple is a great business. But I have severe misgivings about its longevity, and the way it treats its customers.

Last week, I seriously looked at shorting Apple’s stock, but in the end, I thought better of it. After all, Apple’s products are still selling like hotcakes, and it’s making great strides into the emerging markets.

Apple released a trading update on Monday, and boy did I wish I’d put my money down on a short position. It reported record profits, but the stock took an 8% whack.

Apple’s problem isn’t sales. It’s got plenty of those. The problem is growth – or lack thereof. And if Apple is no longer considered a growth stock, then there needs to be a fundamental revaluation of the shares.

Apple is no better than Ryanair

At first sight, Apple’s customer service may look nothing like Ryanair’s. After all, Apple’s loyal fan-base seems to love the products and I’m pretty sure that Apple doesn’t flagrantly abuse its customers like Ryanair does. But there are some similarities.

First, customers are loyal because they’re forced to be. Apple operates what’s known as a ‘walled garden': Apple controls its products’ operating software, and also decides what applications and services you’re allowed to use.

Like Ryanair, once you’re on its plane, you’re limited to what it wants to offer you. Three quid for a bottle of water anyone?

But it’s not just customer services that Apple controls with its iron fist. It’s the hardware too. One of the big reasons I’m against Apple’s mobile gadgetry (which is the most important aspect of Apple’s business) is because of how limiting the stuff is.

Take the latest iPhone. It’ll cost you 50 quid more for a higher spec unit if you want to increase the memory from a measly 8GB to 16GB. Other customers can just add a memory card to their phone. I just upgraded my phone’s memory by 32GB for less than £15.

Of course, this means Apple makes very decent margins. In fact, Apple’s gross margin comes in at just under 40% – that’s at least double what any other hardware maker might expect.

Apple is clearly profitable. But is this sustainable? I propose not. There are now cheaper and better alternatives.

The fall of a giant

Apple just can’t keep up. Market share is falling – from about 18% last year, I see it falling to 15% by the end of this year. Though that may not sound like a lot, in reality it’s a massive drop.

As market share falls, the business will find it increasingly difficult to keep up with Google’s Android offering.

Regular readers will know that I’m a fan of Google, and the way it’s using cloud technology to integrate the user experience. I’m working on documents on my laptop, phone and tablet, seamlessly in the ‘cloud’. I know that Apple offers something similar – but it’s just not as joined up as Google.

Apple’s research and development (R&D) budget has doubled in the last two years. But still market share dwindles. The fact is, Google doesn’t need to spend gazillions on trying to keep up. Much of the R&D function is effectively done by outsiders – they don’t need to control the whole process. Not only is this approach cheaper, but it produces better results.

As I survey the market for Android devices, I see products that could suit just about anyone’s requirements. Literally thousands of devices. With Apple on the other hand, you have to pick from a very limited range indeed.

Of course, Apple has been able to get away with all of this in the past. After all, it was the innovator. It seemed to know what the punter wanted before the punter knew it himself. But now, it looks like the game could be up.

Manufacturers across the globe are innovating like mad, and Apple can’t keep up. A walled garden approach simply isn’t good enough.

Just this morning, Apple’s biggest hardware rival, Samsung, announced that it is to launch 60 new retail stores across Europe. It’s talking about a “powerful new retail concept” that will include an “exciting new customer experience with merges retail and technology innovations”.

I guess what it’s talking about is an experience not unlike Apple’s wonder stores? Apple is going to get hit from all sides. Watch out as the great innovator gets out-innovated.

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  • SevernPirate

    Hallelujah! That’s what happens when consumers blindly buy into a brand and not a solution..

  • Ian Hodges

    This is spot on – Apple probably has the best technology and the best marketing of any company in the world but ALL companies go ex-growth eventually – and with a growth rating / valuation, a painful readjustment is now required to reflect this transition – I will be joining Bengt shorting this stock – something I rarely do but will do with confidence for Apple.

  • Chris N

    Good Luck with your short Bengt – generally I think your insights are more accurate and insightful than most of your Moneyweek colleagues, but I think you’re way off the mark here’s why :
    1) have you visited an Apple store – their customer service is incredible … go upstairs at the Grand Central Station in NYC and prepare to be wowwed !
    2) they have fantastic brand recognition and desirability and will out-sell Samsung in China … the Chinese generally hate other Asians and their products
    3) even if innovation and growth don’t occur, Apple can simply buy-back $100bn of shares with their cash pile and move the p/e ratio down from an already low 13 to single figures – unheard of for a tech stock

  • humpty

    We’ve seen it before. Apple is a one trick pony. A good one at that, but dependant on innovation. It avoids ‘copying’ profitable trends that other companies excel at. Like for instance larger screen phones. It’s loyalty depends on hype and fashion. They need to come out with something new, like, a better version of google glass. It’s stagnated before, and it’ll do so again. I don’t know of any company that really cares about it’s own share price.

  • Ellen12

    I agree with you. Steve Jobs enjoyed a god like status and was a PR guru. He introduced new products and gave whole packages of brilliant software away, free, with them. And although the cult-like nature of Apple enthusiasts scare me a bit, they definitely found their place in the market – though in the more artistic, graphic, creative and photographic end of things.

    I would like to share my experience, as a consumer. My Mac is an OSX Lion but I previously had and OSX Snow Leopard. The Lion hadn’t got iDVD, something that had been standard with the previous model, Snow Leopard. Its very useful if you already have personal stuff on DVD, or want to make up DVDs for family members or receive them, but Apple told me I would have to buy it as extra on the Lion. They want to stream everything through the cloud now and had planned on discontinuing iDVD completely in the near future. iWEB was another thing they dropped – a baby website builder. Nothing as powerful as Hostgator or GoDaddy, but useful and informative for beginners to site building. They have always been incompatible with other makers of software, particularly in connection to business types of applications, but they always got away with that because they had a great product.

    RyanAir are cheap – Apple is not. You can bring you own sandwiches onto a RyanAir flight but you need to be careful about Apple compatibility when looking at software applications. What has finished it for me was when I went to look for a music dock before Christmas and I discovered that the iPhone 5 dock is different to the iPhone 4 one. I have a 4s. When I asked about it, the assistant told me I would need to buy a converter (£25) to allow me use the iPhone 4 on the dock.

    I was also going to get a tablet over the Christmas period and decided to avoid Apple, largely because they try to be too different to everyone else and I want my device to be compatible with as much as possible. I also don’t want them to make my new iPad obsolete as quickly as they made my iPhone. So I bought a Samsung Note and its fine.

  • IJ1

    All i can say is – your money, not mine, Bengt. Let’s leave aside what our personal biases might be (ios versus Andoid, customer service etc) and stick to the facts. This is what you have to contend with if you’re shorting Apple. First of all, this is a company with a net cash position of $150 bln – enough to buy out the entirety of Gazprom and Lukoil and entire sectors of the US economy: potentially a weapon of mass destruction if you’re short. If you adjust for this cash, it trades at 3x EV/EBIT. Do you not think the fundamental adjustment away from growth stock has already happened? So i think we can agree that Apple shareholders are not paying or growth. Secondly: what if their R&D DOES bear fruit and they DO come out with a ground-breaking new product? As this is currently a free option for shareholders of Apple, the shares will go up a lot of this happens. Finally, what if Apple bows to Icahn and announces a massive share buyback. Again – shorts will get blowtorched. So all this being the case, please explain how shorting Apple offers an attractive risk / reward? What’s your upside versus downside? Frankly, if you can’t find better shorts than this, you shouldn’t be dishing out investment advice.

  • Tin

    I would not write them off SO quickly. Long term, they are now beholden to the short-termism that being run by a shareholder pleasing non-founder brings, and their boldness and innovation will falter. But that’s not different to Samsung et al – only Google can threaten them.

    For now, they have probably the world’s strongest brand, and no-one can touch their software in terms of quality. For example, I just exhibited at a technology trade show and at set-up the Google stand was full of their staff’s MacBooks, yet as soon as the show opened they switched them to their Chromebook devices.

    The iPhone no longer has the best hardware (I’m a Nexus user) but iOS is far superior to Android, and with the iPhone 6’s predicted larger screen they could easily retake the smartphone crown.

  • robin

    Apple is incredibly arrogant. Even during Jobs day there were things that were blatantly arrogant; the apple mouse was terrible, Finder is awful. I’ve always like how on a Windows machine you intrinsically use file associations and explorer to do things, while on a Mac you are pushed into an application centric viewpoint. Then look at what apple are doing with DVDs, Java and Blu-Ray. They are very arrogantly denying their customer base access to industry wide media formats there.

    Today I think their lack of compatibility is more of a cynical attempt to lock in customers. Its a Walled Garden, exactly as Bengt describes. But I’m not convinced that google offer a better level of quality; Firstly the google play store is horrible and secondly the level of choice is much worse than itunes. Finally the software quality level just isn’t there for applications on google play.

    Eventually Apple will be more and more repressive. Innovation is something that does well in the right culture. The culture at Apple isn’t about outstanding design anymore, its about profits.

    Something else to keep in mind; Look at their share price about 15 years ago. They were nothing. It took one device, the iPhone to change the picture completely. They have other products in their produce line, its true, but those are innovations rather than revolutions. Another company could come along tomorrow and cause the same upset. It wouldn’t even take drastic advances in technology. The innovations at apple was the online app store concept; buy a game or music through iTunes and it plays on your phone. And the touchscreen phone concept. These two ideas in conjunction were what made the magic. But Apple didn’t invent either concept. They just put them together. So you don’t even need to invent new tech to make it happen.

    Look at curved TVs. This is rubbish. Its great tech but its not revolutionary. Same with these stupid watch concepts. TVs are like cameras these days. The megapixel spec of a camera doesn’t matter as much as the quality of the lens. The new generation of TVs is about screen resolutions. I don’t think it matters as much as the software on the TV. The experience you have sitting in front of it.

    Imagine if someone produced a TV that you could talk to. You walk into your lounge sit down and talk to your friend. Your TV knows you are not talking to it, because you are not looking at it. Then when you talk, it knows that what you say is a command not to be confused with what others might say as your voice is originating from a single point in the lounge that matches up with your face looking at the TV. Then someone rings the doorbell, and a small window opens on your TV displaying the feed from the CCTV camera at your front door.

    Now what I just described isn’t something akin to inventing calculus. Its just a better idea of what to do with a TV with tech that we mostly have these days. And yet; look at the industry… nothing!! What are they doing?? Another Apple could happen tomorrow. Apple is doomed.

  • maggot

    robin, DVDs, Java, and Blu-Ray? Another Apple could happen tomorrow. Apple is doomed. I sincerely fail to understand what’s going on inside you.

  • tesco

    how’s that short going? rule #1: don’t invest in what you don’t understand! And if it’s Apple, don’t short it. iTunes store alone is the 130 largest company in America.

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