(AAPL) yesterday -- from buy to neutral and mainly on concerns of carrier subsidies -- I thought it would be good to share my full TechStrat post issued to subscribers on March 21. In it, I outline what I see as the four key long-term risks to Apple. In my view, the carrier subsidy lands at No. 3. See the full except below.
Apple finally announced the most expected dividend in the history of "distribution-kind." I largely see this as a non-event to the stock., though an incremental positive. I also disagree with many assessments I hear about the company that it should issue a special one-time dividend or do a very large stock buyback. At these prices I think that would be foolhardy.
Apple did issue a non-dilution buyback, which I think is fine. Personally, I prefer to see buybacks on stocks as an aggression play against severe undervaluation or to counter a short-term negative catalyst. So in my view, an Apple buyback would have been much better during the summer of 2006 when Steve Jobs was embroiled in the stock option back-dating scandal or during the 2008/09 period when the stock was egregiously undervalued.
Anyway, I say enough of all this dividend talk, and with the stock right back to the $600 level plus, I want to talk about the real risks I see facing the company.
1. Going ever more proprietary
-- A primary risk I've previously stated
is Apple "moving to proprietary chip" technology. This is directly related to the company's core chip technology, but I see this now potentially moving into the Flash space. Essentially, Apple is telling the whole semi industry that it is willing to cut them out and it has a history of doing so already. The more I look at Apple Anobit's deal, the more I think the next major area where Apple is going to try and squeeze out margin is in Flash. If I'm senior management at a leading semi shop I would make it a priority to ensure that competitive platforms to Apple excel. And in fact, I believe this has been a key reason why Android
(GOOG) and now Windows 8
(MSFT) designs are seeing the pace of innovation and support they're seeing (from the semis).
2. Flash/SSD margins
-- Numero two is connected to the prior risk, Flash/SSD reselling margins. One of the primary drivers of margin for Apple in the iPhone and iPad is its ability to upcharge for more memory. Apple garners a huge margin for reselling Flash/memory. Specifically, reselling the incremental SSD in each iPad with more memory. The 16GB iPad is priced at $529 vs. the 64GB at $729. Of that $200 difference, Apple is keeping a huge percentage of it in profit; likely around half or more. Ditto for the iPhone. At some point, the amount of upcharge (or margin) for reselling Flash could become more constrained.
3. Carrier subsidies
-- This has long been talked about as an issue. I remember when AT&T
(T) started selling the first iPhone, and many were speculating how long the "very premium" subsidy would last. That was 2007 and I don't think anyone, myself included, thought Apple would maintain the level of subsidy. Most likely, this won't change until something else has cracked first. This could be competition, a technology disruption, or a mix of things. But in other words, the subsidy won't be the first warning shot if it gets cut.
4. Competition, specifically Ultrabooks?
-- I could just mention these competition broadly. However, thus far Apple has seen Android smartphones go from zero to over 50%. They have also seen Android tablets take about 40% of the market, at least in Q4 of last year. Moreover, aside from those two areas, I can't think of a product line in which Apple has not continued to meet even high expectations of meaningful share gain -- especially industry profit share. And even with regard to phones and tablets, Apple has held or increased share, and that is the key -- holding and/or increasing share. In my view, for competition to hurt Apple's bottom line, it will need to take share. Enter Ultrabooks? Will Ultrabooks be an area to start slowing Apple's share take? In laptops? With the MacBook Air? How about iPads?
I could be wrong, but I see the Ultrabook wave coming, and its going to hit Apple somewhere. Gun to head, I'm thinking this could slow Apple's share take in at least one of the three areas above, if not more.
Is the above enough to materially harm Apple's stock performance? To me it's too early to call. However, I'm prepared to act -- armed with my thesis and the key product areas I'll be watching.