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Apple: Dismantling a Bearish Argument Against the Tech Powerhouse


A bearish argument aimed at Apple deserves a response.

I'm a happy Apple (AAPL) product user and shareholder, and I usually do a good job of ignoring misplaced bearish arguments against the stock.

In fact, I've publicly stated that I'd like the seemingly endless stream of bullish data points and commentary regarding holiday-season Apple product sales to quiet down. (See: Apple iPhone Bulls, Please Keep Quiet)

However, today's article from Thomas H. Kee Jr. on Marketwatch entitled "Time to Sell Apple" deserves a hearty response from this side of the aisle.

So let's take a look.

Mr. Kee states:

"Apple has stopped serving their customers well, and unless they start to serve their customers better the company will begin to lose more market share and revenue and earnings projections will come down aggressively. Most people think Apple's customers are the end user, but because Apple relies so heavily on third-party resellers like Verizon (VZ) and Sprint (S), both of which are feeling margin contraction and negative effects on earnings because of the extremely high cost of iPhones, the real customers are third-party resellers, and Apple is not treating them right."

Now, according to Gartner, Apple did lose market share in the third quarter of 2011, going from 16.6% to 15.0% year-over-year. However, that trend was almost certainly reversed in the fourth quarter for three reasons:

1.iPhone sales were unnaturally slow in the third quarter because unlike previous models, the iPhone 4S hit in the fourth quarter.

2. Everyone from AT&T (T) to Best Buy (BBY) to Qualcomm (QCOM) to Broadcom (BRCM) gave indications that the iPhone 4S is doing huge numbers.

3. HTC and Motorola Mobility (MMI) sales collapsed in Q4.

Mathematically, there is almost zero chance that Apple didn't gain market share in Q4.

Plus, I'll put on my Captain Obvious hat and point out that if those carriers had problems with the high cost of iPhones, they wouldn't have stocked them in the first place! But they did stock them, because a lot of consumers demand iPhones. In fact, Mr Kee. himself points out that "the iPhones may bring customers in the door, so the carriers won't ever stop selling them."

Would Verizon and Sprint be better off if they pushed more, let's say, Research in Motion (RIMM) BlackBerries?

Mr. Kee goes on to say that "We all know that Apple's products were revolutionary, but they are not nearly as elite as they were."

Is Apple revolutionary? Who knows? Mr. Kee doesn't offer any evidence or anecdotes to support this claim.

But look at the tech landscape. I see a mobile-phone industry that was, and still is, monumentally disrupted by the iPhone. The tablet industry is desperately trying to catch up to the iPad, and failing miserably. Intel (INTC) is desperate to push Ultrabooks because of the runaway success of the Macbook Air, and consumers don't seem to care.

Making stuff that consumers go gaga for and the competition constantly tries to copy? If it ain't revolutionary, it's still pretty darn good.

Mr Kee. goes on to say, "The company's high-growth phase is behind it, and the struggles of the retail market are starting to impair this once seemingly unbreakable retail giant; unbreakable has been the corporate attitude as we know."

Yes, Apple's high-growth phase is behind it -- but everyone knows that already. And as far as retail goes, in fiscal 2011, Apple store revenue rose 44%, while revenue per store increased by 27%. I don't exactly see any "struggles of the retail market" here. And while Apple store productivity slowed last quarter, it's set to bounce back immensely because of the iPhone 4S' release.

The next topic is price. Mr. Kee's take: "After a while, selling a $500 slight upgrade to consumers who are strapped for cash will not produce the same results, we all experienced that with the iPod, but that is just the beginning."

I agree that the iPhone 4S is only a slight upgrade to the iPhone 4.

But it starts at $199 -- not $500. And incidentally, $199 is cheaper than some hit Google (GOOG) Android phones like the Motorola DROID RAZR and Samsung Galaxy Nexus, which go for $299.

And yes, the iPod business is shrinking, but that's because Apple took the proper strategic step of cannibalizing it with the iPhone. And in fact, the iPod destroyed the competition in spite of being significantly more expensive than the competition in terms of price relative to storage size and feature set.

Mr. Kee also opines that, "If you own AAPL and you are expecting the company to grow like it has in the past, you are sorely mistaken." I'd counter by saying again, we all know Apple's high-growth phase behind it. The company just flew past the $100 billion revenue park, and nobody with a brain that's actually looked at the numbers expects 50% or 60% or 70% growth out of Apple.

And finally, Mr. Kee warns investors to seek single-digit P/E multiples in 2012. Only thing is, we're not far off. Apple trades at 12 times expected 2012 earnings, and has $87 a share in cash.

Come on, this isn't freaking (CRM)!

Now, what do I fear with Apple? Well, I worry about the company's ability to keep its edge without Steve Jobs cracking the whip and serving as the world's greatest salesman. The European economy is most certainly a problem. And eventually, smartphone penetration is going to limit growth potential, and it's unclear that tablets can pick up the slack.

But for now -- I'm not seeing any reason to sell.

Twitter: @MichaelComeau

Also see: Why Calls to Sell Apple Are Premature, but Not Unfounded

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No positions in stocks mentioned.
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