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Correcting an Apple Bear, One More Time


A vocal Apple bear continues to knock the stock, but fails to put money where his mouth is.

On January 12, I posted an in-depth rebuttal to a negative Apple (AAPL) article on Marketwatch by a Mr. Thomas Kee. (See: Apple: Dismantling a Bearish Argument Against the Tech Powerhouse)

Among other things, Mr. Kee believed that Apple "has stopped serving their customers well" while noting that "the company will begin to lose more market share," and that "revenue and earnings projects will come down aggressively."

Since then, Mr. Kee has been unequivocally proven 1,000% dead wrong. As evidenced by its magnificent first-quarter earnings report, Apple is:

1. gaining significant market share in smartphones and PCs;
2. dominating the tablet market it created with the iPad;
3. seeing a massive increase in earnings estimates.

And yet, he's out beating the sell drum again.

So once again, I'm going to have to take his article apart, piece by piece.

And I'm going to do it not with the name-calling and petty insults that some clowns on the Internet prefer -- but with cold, hard facts.

In fact, I hope Mr. Kee responds to this piece with one of his own, and of course, I invite any Apple bears to make their own arguments in the comments section below.

So here we go.

Mr. Kee begins by referencing the large volume of hate mail he received, and saying that "if you are holding AAPL and believe they will be able to repeat the past quarter's results, be warned by this article" before adding that what "we have just witnessed may be the peak of the growth chart that has driven this stock since 2005."

I just don't get this. No rational person expects Apple to drive 73% revenue growth until the end of time. In fact, Wall Street analysts' forecast imply a 43% increase in sales this year, and a 16% next year. People are expecting a slowdown in growth!

Shortly thereafter, Mr. Kee enters some dicey waters:

First, any wireless carrier would be a fool not to carry AAPL products, because those products bring patrons into the store. However, because AAPL charges so much for their products the more they buy from AAPL, the more of a beating they will take and the tighter margins will be, that means pressure on earnings, and finally unhappy shareholders. Take a look at the response shareholders had to Sprint. Shares of Sprint are down 26% since they announced their purchase of iPhones at the beginning of October; [Verizon] shares were hit just recently on margin issues too, but they did not make the mistake as Sprint.

In fact, Sprint's purchase of 30.5 million iPhones, worth $20B, is exactly what propelled AAPL's earnings this past quarter.

He also adds this:

It will take about 6 quarters, or 1.5 years for Sprint to work through its inventory. By that time a new version will be out, and Sprint will take a hit to margins even greater than it already has.

This sounds great, except for one thing: The $20 billion for 30.5 billion iPhones figure came from a Wall Street Journal report quoting people "familiar with the matter" -- not the company.

Sprint's (S) actual announced agreement is for a minimum of $15.5 billion in iPhones sold over a four-year period. A four-year period. So no folks, Sprint did not buy 30.5 million iPhones at one time!

In fact, Mr. Kee should apologize to Sprint's management team, because apparently he thinks they're pretty dumb. Who would pay current prices for six quarters of inventory of a smartphone that will be replaced within three quarters?

And let's grab a quote from Sprint's last earnings call:

Our early results of selling the iPhone 4 and iPhone 4S have confirmed the iPhone's ability to attract new customers. What one hopes to see from a device is a high percentage of gross adds, new customers and new revenue to Sprint. The time we have been selling this device is very short, but early results indicate the iPhone is breaking the previous Sprint record held by the EVO in terms of the percentage of device buyers who are gross adds or new to Sprint in the weeks following the launch.

We can argue all day and all night whether Sprint is right about the long-term cost/benefits of the iPhone. But heck, I'd argue that Sprint's shares might actually be even lower if they didn't get a deal with Apple in time for the iPhone 4S release. As Mr. Kee himself said, "those products bring patrons into the store." Does anyone think that Sprint wouldn't be bleeding customers to Verizon (VZ) and AT&T (T) if they didn't carry the iPhone?

I tell ya, you'd see riots in the streets if any of these carriers dropped the iPhone.

Now that we've laid all that out, we can move on.

Mr. Kee closes with this:

I am suggesting that sales growth like what we have been witness to will not continue at the same rate. This stall is coming, it is closer than most people think, and what we were just witness to is likely the peak in this growth cycle. The company will not be able to match that growth rate again, and from here, the company will transition into a much slower growth giant. If that's true, the P/E multiple for AAPL is also likely to decline, and therein lays my rationale to sell AAPL. Anyone expecting another Sprint-like purchase is at best hopeful, but more reasonably mistaken.

This is a perfectly valid opinion. But again -- nobody with a functioning brain expects Apple to grow at 73% forever! Such a rate of expansion would make Apple literally a multi-trillion-dollar-in-sales company by the next decade!

Mr. Kee's fundamental problem is that he is completely out of touch with the market's actual expectations. Yes, Apple is a universally loved stock. We get that. But it is also universally agreed upon that growth is slowing, and that's reflected in the stock's valuation. This is not (CRM), ladies and gentlemen.

Apple is already pricing in a slowdown in growth. It's trading at 11 times forward earnings! Not 100!

Perhaps Mr. Kee will point that out in his next hit piece.

Or maybe he'll put his money where his mouth is and get short.


Apple bears don't really do that sort of thing.

Catch me on Twitter: @MichaelComeau

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