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For all those fanboys who bought into the Apple infallibility and the "aapl is going to the moon" mantra, but are now left scratching their heads wondering what's going on, this post is for you.
Let's first look at where we've been:
Apple of course needs no introduction. Most all us either own, or have had our lifestyles enhanced by the company's products (or lookalikes) one way or the other. The Apple stock no doubt had all the necessary ingredients to make it a great success, once the company gained its footing in the consumer electronics market, with Steve Jobs leading the transformation from a computer company with a niche appeal to techno geeks and graphic designers to one with a mass market appeal. And what a transformation it was. The company under Steve Jobs seemed like an unending conveyor belt of innovative leading edge products delivered to the market with flair, it had amazing profit margins and a cult-like devotion to the status symbol brand by its customers. The logo became iconic. Every financial analyst was bullish on Apple, many publishing predictions of the share price, at this pace, going over $1,000 soon and Apple reaching a market value of over a $ trillion. But did all this explain the stunning growth of this stock? No, it didn't. This did.
Apple became a safe heaven and momentum play for hedge funds. The FED was conjuring money out of thin air which was handing out to its friends at no cost. Those who got their hands on it first looked for a "safe" place to pile in and profit. USG Treasuries were one but with yields range bound that didn't offer much opportunity but for the most risk averse. Apple did. And every one piled in, banks, primary dealers, brokerage houses and just about every hedge fund on the planet into the most overcrowded momentum play going on the market. Buying aapl became an "one-way" trade. This works fine as long as capital investment keeps flowing in and momentum keeps driving the stock price up, even when dark clouds appear on the horizon. But when the risk assessment changes, when sentiment can no longer ignore the dark clouds, things change to the downside very quickly.
Apple went on an amazing run this year, supported by an attractive 12/1 P/E and over $100 Big ones (B as in billion) in cash, investors piled in sending the stock price from about $413 at the start of the year, up almost in a straight line, to an all time high of about $705 in late September (it was $100/share in early 2009). Which essentially meant that the company added about $270bn to its market value in a mere nine months. Investor confidence in Apple's invisibility was reaching a climax, sentiment was driving everything.
What could go wrong?
An earnings miss, badly managed public relations efforts in relation to Foxconn and the litigation against Samsung, a lackluster iPhone5 launch and the tide had quickly turned. The launch of the iPhone5 also debunked the myth that Steve Jobs had left a whole bunch of new products in the pipeline waiting to be introduced to the market. No new product appeared on the visible horizon and the iPhone was no longer the best smartphone on the market; there's reason why it's currently being out-sold by Samsung's Galaxy S3 - consumers voted with their money. It was released to the market without what Steve Jobs always managed to successfully do when launching new products. Differentiate them from the competition's by including a new leading edge feature that no one else had, and delivered to the consumer with Apple style and flair. On top of that, the launch of the mini iPad was starting to look like a strategic blunder. Yes, they would sell a pile of them, but at what profit margin, how many of those sales would strictly be cannibalization of their regular high margin iPad sales and at what cost to the brand with some analysts now essentially labeling Apple a…..toy manufacturer, something that would have been unthinkable during Steve Job's reign or even just a few short weeks ago.
A massive $170bn of shareholder wealth vanished into thin air in a matter of a few weeks. Just to put this in perspective, this market cap loss is about the same as the entire market cap of Johnson & Johnson, an international healthcare and consumer products behemoth, going to ZERO in a matter of weeks. Simply unthinkable
What went wrong:
The numbers didn't add up: If we examine the product launches we've seen in 2012, the sales forecast of the devices launched, the 1-2 years of planned obsolesce (more on that later), the average selling price of the device and assuming a very healthy 40pc gross profit margin (we don't know for sure), then Apple investors would expect somewhere between $30-35bn in pre-tax profit. The $270bn increase in valuation therefore can hardly be justified based on those numbers. Which can only lead to the conclusion that the Apple momentum and sentiment investors were pricing in what they perceived to be an unlimited ability to bring new innovative products to the market with new consumers continuing to line up to buy and existing users to upgrade. In most cash flow analysis models, in order to justify a $700+ share price, Apple would have to hit a mind boggling $3.5 trillion in revenue over the next ten years (for context, last year's revenue totaled $108bn), assuming their operating margin stayed at the current high levels, a very unlikely assumption.
The fanboys are becoming disillusioned: Apple's business model is based on almost obsessive control of the entire ecosystem combined with a strategy of providing customers a constant need to upgrade or buy new products as well as subscribe to services. This works well as long as you have the best mouse trap on the market and keep innovating to bring out new great mouse traps. It doesn't work so well, when your loyal customer base is now starting to perceive you as just another greedy corporation taking them for a ride because the "new" products are just marginal evolutionary improvements from the one they are replacing with revolutionary ground breaking improvements hard to come by. This point was driven home with the recent replacement of the dock on the new iPhone and iPads which basically rendered all devices that used to attach to the old style dock obsolete. The introduction of iPad4, largely obscured by the launch of the mini iPad the same day, coming so quickly after the launch of the 3 version was also not well received by their devoted customers. The fanboys were finally clueing in that ever shorter product cycles, in other words ever shorter planned obsolesce, may be good for Apple profits but not so good for their pocket books.
The "cool" of the brand is fading: It all started with stories in the press around the awful working conditions at Foxconn leading to worker suicides, layered on top of more negative publicity revolving around the antitrust probe (and subsequent fines) of trying to control ebook prices. Also, secretly GPS-tracking iPhone users was decidedly not cool. Remarkably however, the turning point in how the company was perceived by the public was Apple's own legal win over Samsung for patent infringements delivered in a courthouse just a stone throw from their headquarters by a sympathetic Silicon Valley jury and a judge that should have disqualified herself from presiding over the case in the first place. In the blink of an eye, the totally casual, trend setting, Steve Job's gang from Cupertino, who brought us all these glitzy "must have" products, had evidently switched from looking cool in Agave jeans and Ray Ban shades to wearing banker pin-stripped suits and now wouldn't talk to anyone unless a lawyer was standing by their side. Apple stopped innovating and started litigating, with consumers (and their competitors) around the planet stunned to find out that round corners can indeed be patented. Apple was correctly perceived by the public as blocking competition which inevitably leads to better prices for consumers. Combine this with trying to block sales of the Galaxy 3 when clearly that smartphone was gaining favour among American consumers and attitudes towards Apple were changing. Apple was starting to look profoundly uncool.
Margin compression: Patent lawsuits notwithstanding, Apple's success was just to stunning to be ignored by competitors. Their technology was just too successful not to be copied (it was), or altered slightly to get around patent infringement issues, or just simply improved on. Building their products in China ensured that the "copying" would take place all that much quicker. Margin compression is unavoidable, especially as others close the gap in performance and the shine on the Apple brand loses some of its shine. Apple willingly jumping into lower margin market territory with the mini iPad merely confirms their acceptance of future lower operating margins.
Technicals were breaking down: Once the stock started it's downward trend, key support levels (200MDA, 50MDA) were breached and any rallies failed to brake through neck lines. The result was more selling momentum strictly based on the tale the charts were telling.
An assortment of other factors: a strong advertising campaign by Samsung exploiting the very uninspiring iPhone5 release, experts and consumers alike disappointed with the new iOS6 operating system including the blunder of introducing a map application that they knew clearly wasn't up to par and other more minor factors were all contributing to Apple's misfortunes. The straws were piling on the camel's back, slowly but surely.
Where do we go from here:
Apple will be around for a long time making good products, but not necessarily the iconic leading edge "thinking out of the box" products that we got used to seeing from them. They will be very relevant but no longer infallible. Nothing stays the same, especially their leadership which has recently openly displayed signs of fracturing leading to several high profile terminations. The competition doesn't stay the same either and neither do fickle consumer tastes. It all amounts to a great deal of risk. No one can say for certain where the stock price will end up, too many volatile variables to consider and weigh properly. My view is that aapl will trade in the mid 400s next year and after bouncing around a bit settle trading in the mid 400s range for some time. Those late comers to the party who bought around the top will have to endure a lot of pain. Apple is an epic success story but if the markets have proven anything over time is that no company should be considered invisible.
P.S. Could aapl trade over $1,000 some day? Count on it, but just not for the reasons every sell-side Wall Street wh0re was spewing. What they didn't tell you is that a loaf of bread will be ten quid when that happens.
Let's first look at where we've been:
Apple of course needs no introduction. Most all us either own, or have had our lifestyles enhanced by the company's products (or lookalikes) one way or the other. The Apple stock no doubt had all the necessary ingredients to make it a great success, once the company gained its footing in the consumer electronics market, with Steve Jobs leading the transformation from a computer company with a niche appeal to techno geeks and graphic designers to one with a mass market appeal. And what a transformation it was. The company under Steve Jobs seemed like an unending conveyor belt of innovative leading edge products delivered to the market with flair, it had amazing profit margins and a cult-like devotion to the status symbol brand by its customers. The logo became iconic. Every financial analyst was bullish on Apple, many publishing predictions of the share price, at this pace, going over $1,000 soon and Apple reaching a market value of over a $ trillion. But did all this explain the stunning growth of this stock? No, it didn't. This did.
Apple became a safe heaven and momentum play for hedge funds. The FED was conjuring money out of thin air which was handing out to its friends at no cost. Those who got their hands on it first looked for a "safe" place to pile in and profit. USG Treasuries were one but with yields range bound that didn't offer much opportunity but for the most risk averse. Apple did. And every one piled in, banks, primary dealers, brokerage houses and just about every hedge fund on the planet into the most overcrowded momentum play going on the market. Buying aapl became an "one-way" trade. This works fine as long as capital investment keeps flowing in and momentum keeps driving the stock price up, even when dark clouds appear on the horizon. But when the risk assessment changes, when sentiment can no longer ignore the dark clouds, things change to the downside very quickly.
Apple went on an amazing run this year, supported by an attractive 12/1 P/E and over $100 Big ones (B as in billion) in cash, investors piled in sending the stock price from about $413 at the start of the year, up almost in a straight line, to an all time high of about $705 in late September (it was $100/share in early 2009). Which essentially meant that the company added about $270bn to its market value in a mere nine months. Investor confidence in Apple's invisibility was reaching a climax, sentiment was driving everything.
What could go wrong?
An earnings miss, badly managed public relations efforts in relation to Foxconn and the litigation against Samsung, a lackluster iPhone5 launch and the tide had quickly turned. The launch of the iPhone5 also debunked the myth that Steve Jobs had left a whole bunch of new products in the pipeline waiting to be introduced to the market. No new product appeared on the visible horizon and the iPhone was no longer the best smartphone on the market; there's reason why it's currently being out-sold by Samsung's Galaxy S3 - consumers voted with their money. It was released to the market without what Steve Jobs always managed to successfully do when launching new products. Differentiate them from the competition's by including a new leading edge feature that no one else had, and delivered to the consumer with Apple style and flair. On top of that, the launch of the mini iPad was starting to look like a strategic blunder. Yes, they would sell a pile of them, but at what profit margin, how many of those sales would strictly be cannibalization of their regular high margin iPad sales and at what cost to the brand with some analysts now essentially labeling Apple a…..toy manufacturer, something that would have been unthinkable during Steve Job's reign or even just a few short weeks ago.
A massive $170bn of shareholder wealth vanished into thin air in a matter of a few weeks. Just to put this in perspective, this market cap loss is about the same as the entire market cap of Johnson & Johnson, an international healthcare and consumer products behemoth, going to ZERO in a matter of weeks. Simply unthinkable
What went wrong:
The numbers didn't add up: If we examine the product launches we've seen in 2012, the sales forecast of the devices launched, the 1-2 years of planned obsolesce (more on that later), the average selling price of the device and assuming a very healthy 40pc gross profit margin (we don't know for sure), then Apple investors would expect somewhere between $30-35bn in pre-tax profit. The $270bn increase in valuation therefore can hardly be justified based on those numbers. Which can only lead to the conclusion that the Apple momentum and sentiment investors were pricing in what they perceived to be an unlimited ability to bring new innovative products to the market with new consumers continuing to line up to buy and existing users to upgrade. In most cash flow analysis models, in order to justify a $700+ share price, Apple would have to hit a mind boggling $3.5 trillion in revenue over the next ten years (for context, last year's revenue totaled $108bn), assuming their operating margin stayed at the current high levels, a very unlikely assumption.
The fanboys are becoming disillusioned: Apple's business model is based on almost obsessive control of the entire ecosystem combined with a strategy of providing customers a constant need to upgrade or buy new products as well as subscribe to services. This works well as long as you have the best mouse trap on the market and keep innovating to bring out new great mouse traps. It doesn't work so well, when your loyal customer base is now starting to perceive you as just another greedy corporation taking them for a ride because the "new" products are just marginal evolutionary improvements from the one they are replacing with revolutionary ground breaking improvements hard to come by. This point was driven home with the recent replacement of the dock on the new iPhone and iPads which basically rendered all devices that used to attach to the old style dock obsolete. The introduction of iPad4, largely obscured by the launch of the mini iPad the same day, coming so quickly after the launch of the 3 version was also not well received by their devoted customers. The fanboys were finally clueing in that ever shorter product cycles, in other words ever shorter planned obsolesce, may be good for Apple profits but not so good for their pocket books.
The "cool" of the brand is fading: It all started with stories in the press around the awful working conditions at Foxconn leading to worker suicides, layered on top of more negative publicity revolving around the antitrust probe (and subsequent fines) of trying to control ebook prices. Also, secretly GPS-tracking iPhone users was decidedly not cool. Remarkably however, the turning point in how the company was perceived by the public was Apple's own legal win over Samsung for patent infringements delivered in a courthouse just a stone throw from their headquarters by a sympathetic Silicon Valley jury and a judge that should have disqualified herself from presiding over the case in the first place. In the blink of an eye, the totally casual, trend setting, Steve Job's gang from Cupertino, who brought us all these glitzy "must have" products, had evidently switched from looking cool in Agave jeans and Ray Ban shades to wearing banker pin-stripped suits and now wouldn't talk to anyone unless a lawyer was standing by their side. Apple stopped innovating and started litigating, with consumers (and their competitors) around the planet stunned to find out that round corners can indeed be patented. Apple was correctly perceived by the public as blocking competition which inevitably leads to better prices for consumers. Combine this with trying to block sales of the Galaxy 3 when clearly that smartphone was gaining favour among American consumers and attitudes towards Apple were changing. Apple was starting to look profoundly uncool.
Margin compression: Patent lawsuits notwithstanding, Apple's success was just to stunning to be ignored by competitors. Their technology was just too successful not to be copied (it was), or altered slightly to get around patent infringement issues, or just simply improved on. Building their products in China ensured that the "copying" would take place all that much quicker. Margin compression is unavoidable, especially as others close the gap in performance and the shine on the Apple brand loses some of its shine. Apple willingly jumping into lower margin market territory with the mini iPad merely confirms their acceptance of future lower operating margins.
Technicals were breaking down: Once the stock started it's downward trend, key support levels (200MDA, 50MDA) were breached and any rallies failed to brake through neck lines. The result was more selling momentum strictly based on the tale the charts were telling.
An assortment of other factors: a strong advertising campaign by Samsung exploiting the very uninspiring iPhone5 release, experts and consumers alike disappointed with the new iOS6 operating system including the blunder of introducing a map application that they knew clearly wasn't up to par and other more minor factors were all contributing to Apple's misfortunes. The straws were piling on the camel's back, slowly but surely.
Where do we go from here:
Apple will be around for a long time making good products, but not necessarily the iconic leading edge "thinking out of the box" products that we got used to seeing from them. They will be very relevant but no longer infallible. Nothing stays the same, especially their leadership which has recently openly displayed signs of fracturing leading to several high profile terminations. The competition doesn't stay the same either and neither do fickle consumer tastes. It all amounts to a great deal of risk. No one can say for certain where the stock price will end up, too many volatile variables to consider and weigh properly. My view is that aapl will trade in the mid 400s next year and after bouncing around a bit settle trading in the mid 400s range for some time. Those late comers to the party who bought around the top will have to endure a lot of pain. Apple is an epic success story but if the markets have proven anything over time is that no company should be considered invisible.
P.S. Could aapl trade over $1,000 some day? Count on it, but just not for the reasons every sell-side Wall Street wh0re was spewing. What they didn't tell you is that a loaf of bread will be ten quid when that happens.
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Many thanks to the poster who sent me a PM pointing out my many spelling mistakes.
Here's the "cleaned up" version. Enjoy:
For all those fanboys who bought into the Apple infallibility and the "aapl is going to the moon" mantra, but are now left scratching their heads wondering what's going on, this post is for you.
Let's first look at where we've been:
Apple of course needs no introduction. Most all of us either own, or have had our lifestyles enhanced by the company's products (or lookalikes) one way or the other. The Apple stock no doubt had all the necessary ingredients to make it a great success, once the company gained its footing in the consumer electronics market, with Steve Jobs leading the transformation from a computer company with a niche appeal to techno geeks and graphic designers to one with a mass market appeal. And what a transformation it was. The company under Steve Jobs seemed like an unending conveyor belt of innovative leading edge products delivered to the market with flair, it had amazing profit margins and a cult-like devotion to the status symbol brand by its customers. The logo became iconic. Every financial analyst was bullish on Apple, many publishing predictions of the share price, at this pace, going over $1,000 soon and Apple reaching a market value of over a $ trillion. But did all this explain the stunning growth of this stock? No, it didn't. This did.
Apple became a safe heaven and momentum play for hedge funds. The FED was conjuring money out of thin air which was handing out to its friends at no cost. Those who got their hands on it first looked for a "safe" place to pile in and profit. USG Treasuries were one but with yields range bound that didn't offer much opportunity but for the most risk averse. Apple did. And everyone piled in, banks, primary dealers, brokerage houses and just about every hedge fund on the planet into the most overcrowded momentum play going on the market. Buying aapl became an "one-way" trade. This works fine as long as capital investment keeps flowing in and momentum keeps driving the stock price up, even when dark clouds appear on the horizon. But when the risk assessment changes, when sentiment can no longer ignore the dark clouds, things change to the downside very quickly.
Apple went on an amazing run this year, supported by an attractive 12/1 P/E and over $100 Big ones (B as in billion) in cash, investors piled in sending the stock price from about $413 at the start of the year, up almost in a straight line, to an all time high of about $705 in late September (it was $100/share in early 2009), which essentially meant that the company added about $270bn to its market value in a mere nine months. Investor confidence in Apple's invisibility was reaching a climax, sentiment was driving everything.
What could go wrong?
An earnings miss, badly managed public relations efforts in relation to Foxconn and the litigation against Samsung, a lacklustre iPhone5 launch and the tide had quickly turned. The launch of the iPhone5 also debunked the myth that Steve Jobs had left a whole bunch of new products in the pipeline waiting to be introduced to the market. No new product appeared on the visible horizon and the iPhone was no longer the best smartphone on the market; there's reason why it's currently being out-sold by Samsung's Galaxy S3 - consumers voted with their money. It was released to the market without what Steve Jobs always managed to successfully do when launching new products, differentiate them from the competition's by including a new leading edge feature that no one else had, and delivered to the consumer with Apple style and flair. On top of that, the launch of the mini iPad was starting to look like a strategic blunder. Yes, they would sell a pile of them, but at what profit margin, how many of those sales would strictly be cannibalization of their regular high margin iPad sales and at what cost to the brand with some analysts now essentially labelling Apple a…..toy manufacturer, something that would have been unthinkable during Steve Job's reign or even just a few short weeks ago.
A massive $170bn of shareholder wealth vanished into thin air in a matter of a few weeks. Just to put this in perspective, this market cap loss is about the same as the entire market cap of Johnson & Johnson, an international healthcare and consumer products behemoth, going to ZERO in a matter of weeks. Simply unthinkable.
What went wrong:
The numbers didn't add up: If we examine the product launches we've seen in 2012, the sales forecast of the devices launched, the 1-2 years of planned obsolescence (more on that later), the average selling price of the device and assuming a very healthy 40pc gross profit margin (we don't know for sure), then Apple investors would expect somewhere between $30-35bn in pre-tax profit. The $270bn increase in valuation therefore can hardly be justified based on those numbers, which can only lead to the conclusion that the Apple momentum and sentiment investors were pricing in what they perceived to be an unlimited ability to bring new innovative products to the market with new consumers continuing to line up to buy and existing users to upgrade. In most cash flow analysis models, in order to justify a $700+ share price, Apple would have to hit a mind boggling $3.5 trillion in revenue over the next ten years (for context, last year's revenue totalled $108bn), assuming their operating margin stayed at the current high levels, a very unlikely assumption.
The fanboys are becoming disillusioned: Apple's business model is based on almost obsessive control of the entire ecosystem combined with a strategy of providing customers a constant need to upgrade or buy new products as well as subscribe to services. This works well as long as you have the best mouse trap on the market and keep innovating to bring out new great mouse traps. It doesn't work so well, when your loyal customer base is now starting to perceive you as just another greedy corporation taking them for a ride because the "new" products are just marginal evolutionary improvements from the one they are replacing with revolutionary ground breaking improvements hard to come by. This point was driven home with the recent replacement of the dock on the new iPhone and iPads which basically rendered all devices that used to attach to the old style dock obsolete. The introduction of iPad4, largely obscured by the launch of the mini iPad the same day, coming so quickly after the launch of the 3 version was also not well received by their devoted customers. The fanboys were finally clueing in that ever shorter product cycles, in other words ever shorter planned obsolescence, may be good for Apple profits but not so good for their pocket books.
The "cool" of the brand is fading: It all started with stories in the press around the awful working conditions at Foxconn leading to worker suicides, layered on top of more negative publicity revolving around the antitrust probe (and subsequent fines) of trying to control ebook prices. Also, secretly GPS-tracking iPhone users was decidedly not cool. Remarkably however, the turning point in how the company was perceived by the public was Apple's own legal win over Samsung for patent infringements delivered in a courthouse just a stone throw from their headquarters by a sympathetic Silicon Valley jury and a judge that should have disqualified herself from presiding over the case in the first place. In the blink of an eye, the totally casual, trend setting, Steve Job's gang from Cupertino, who brought us all these glitzy "must have" products, had evidently switched from looking cool in Agave jeans and Ray Ban shades to wearing banker pin-stripped suits and now wouldn't talk to anyone unless a lawyer was standing by their side. Apple stopped innovating and started litigating, with consumers (and their competitors) around the planet stunned to find out that round corners can indeed be patented. Apple was correctly perceived by the public as blocking competition which inevitably leads to better prices for consumers. Combine this with trying to block sales of the Galaxy 3 when clearly that smartphone was gaining favour among American consumers and attitudes towards Apple were changing. Apple was starting to look profoundly uncool.
Margin compression: Patent lawsuits notwithstanding, Apple's success was just too stunning to be ignored by competitors. Their technology was just too successful not to be copied (it was), or altered slightly to get around patent infringement issues, or just simply improved on. Building their products in China ensured that the "copying" would take place all that much quicker. Margin compression is unavoidable, especially as others close the gap in performance and the shine on the Apple brand loses some of its glare. Apple willingly jumping into lower margin market territory with the mini iPad merely confirms their acceptance of future lower operating margins.
Technicals were breaking down: Once the stock started its downward trend, key support levels (200MDA, 50MDA) were breached and any rallies failed to break through neck lines. The result was more selling momentum strictly based on the tale the charts were telling.
An assortment of other factors: a strong advertising campaign by Samsung exploiting the very uninspiring iPhone5 release, experts and consumers alike disappointed with the new iOS6 operating system including the blunder of introducing a map application that they knew clearly wasn't up to par and other more minor factors were all contributing to Apple's misfortunes. The straws were piling on the camel's back, slowly but surely.
Where do we go from here:
Apple will be around for a long time making good products, but not necessarily the iconic leading edge "thinking out of the box" products that we got used to seeing from them. They will be very relevant but no longer infallible. Nothing stays the same, especially their leadership which has recently openly displayed signs of fracturing leading to several high profile terminations. The competition doesn't stay the same either and neither do fickle consumer tastes. It all amounts to a great deal of risk. No one can say for certain where the stock price will end up, too many volatile variables to consider and weigh properly. My view is that aapl will trade in the mid 400s next year and after bouncing around a bit settle trading in the mid 400s range for some time. Those late comers to the party who bought around the top will have to endure a lot of pain. Apple is an epic success story but if the markets have proven anything over time is that no company should be considered invisible.
P.S. Could aapl trade over $1,000 some day? Count on it, but just not for the reasons every sell-side Wall Street wh0re was spewing. What they didn't tell you is that a loaf of bread will be ten quid when that happens.
Here's the "cleaned up" version. Enjoy:
For all those fanboys who bought into the Apple infallibility and the "aapl is going to the moon" mantra, but are now left scratching their heads wondering what's going on, this post is for you.
Let's first look at where we've been:
Apple of course needs no introduction. Most all of us either own, or have had our lifestyles enhanced by the company's products (or lookalikes) one way or the other. The Apple stock no doubt had all the necessary ingredients to make it a great success, once the company gained its footing in the consumer electronics market, with Steve Jobs leading the transformation from a computer company with a niche appeal to techno geeks and graphic designers to one with a mass market appeal. And what a transformation it was. The company under Steve Jobs seemed like an unending conveyor belt of innovative leading edge products delivered to the market with flair, it had amazing profit margins and a cult-like devotion to the status symbol brand by its customers. The logo became iconic. Every financial analyst was bullish on Apple, many publishing predictions of the share price, at this pace, going over $1,000 soon and Apple reaching a market value of over a $ trillion. But did all this explain the stunning growth of this stock? No, it didn't. This did.
Apple became a safe heaven and momentum play for hedge funds. The FED was conjuring money out of thin air which was handing out to its friends at no cost. Those who got their hands on it first looked for a "safe" place to pile in and profit. USG Treasuries were one but with yields range bound that didn't offer much opportunity but for the most risk averse. Apple did. And everyone piled in, banks, primary dealers, brokerage houses and just about every hedge fund on the planet into the most overcrowded momentum play going on the market. Buying aapl became an "one-way" trade. This works fine as long as capital investment keeps flowing in and momentum keeps driving the stock price up, even when dark clouds appear on the horizon. But when the risk assessment changes, when sentiment can no longer ignore the dark clouds, things change to the downside very quickly.
Apple went on an amazing run this year, supported by an attractive 12/1 P/E and over $100 Big ones (B as in billion) in cash, investors piled in sending the stock price from about $413 at the start of the year, up almost in a straight line, to an all time high of about $705 in late September (it was $100/share in early 2009), which essentially meant that the company added about $270bn to its market value in a mere nine months. Investor confidence in Apple's invisibility was reaching a climax, sentiment was driving everything.
What could go wrong?
An earnings miss, badly managed public relations efforts in relation to Foxconn and the litigation against Samsung, a lacklustre iPhone5 launch and the tide had quickly turned. The launch of the iPhone5 also debunked the myth that Steve Jobs had left a whole bunch of new products in the pipeline waiting to be introduced to the market. No new product appeared on the visible horizon and the iPhone was no longer the best smartphone on the market; there's reason why it's currently being out-sold by Samsung's Galaxy S3 - consumers voted with their money. It was released to the market without what Steve Jobs always managed to successfully do when launching new products, differentiate them from the competition's by including a new leading edge feature that no one else had, and delivered to the consumer with Apple style and flair. On top of that, the launch of the mini iPad was starting to look like a strategic blunder. Yes, they would sell a pile of them, but at what profit margin, how many of those sales would strictly be cannibalization of their regular high margin iPad sales and at what cost to the brand with some analysts now essentially labelling Apple a…..toy manufacturer, something that would have been unthinkable during Steve Job's reign or even just a few short weeks ago.
A massive $170bn of shareholder wealth vanished into thin air in a matter of a few weeks. Just to put this in perspective, this market cap loss is about the same as the entire market cap of Johnson & Johnson, an international healthcare and consumer products behemoth, going to ZERO in a matter of weeks. Simply unthinkable.
What went wrong:
The numbers didn't add up: If we examine the product launches we've seen in 2012, the sales forecast of the devices launched, the 1-2 years of planned obsolescence (more on that later), the average selling price of the device and assuming a very healthy 40pc gross profit margin (we don't know for sure), then Apple investors would expect somewhere between $30-35bn in pre-tax profit. The $270bn increase in valuation therefore can hardly be justified based on those numbers, which can only lead to the conclusion that the Apple momentum and sentiment investors were pricing in what they perceived to be an unlimited ability to bring new innovative products to the market with new consumers continuing to line up to buy and existing users to upgrade. In most cash flow analysis models, in order to justify a $700+ share price, Apple would have to hit a mind boggling $3.5 trillion in revenue over the next ten years (for context, last year's revenue totalled $108bn), assuming their operating margin stayed at the current high levels, a very unlikely assumption.
The fanboys are becoming disillusioned: Apple's business model is based on almost obsessive control of the entire ecosystem combined with a strategy of providing customers a constant need to upgrade or buy new products as well as subscribe to services. This works well as long as you have the best mouse trap on the market and keep innovating to bring out new great mouse traps. It doesn't work so well, when your loyal customer base is now starting to perceive you as just another greedy corporation taking them for a ride because the "new" products are just marginal evolutionary improvements from the one they are replacing with revolutionary ground breaking improvements hard to come by. This point was driven home with the recent replacement of the dock on the new iPhone and iPads which basically rendered all devices that used to attach to the old style dock obsolete. The introduction of iPad4, largely obscured by the launch of the mini iPad the same day, coming so quickly after the launch of the 3 version was also not well received by their devoted customers. The fanboys were finally clueing in that ever shorter product cycles, in other words ever shorter planned obsolescence, may be good for Apple profits but not so good for their pocket books.
The "cool" of the brand is fading: It all started with stories in the press around the awful working conditions at Foxconn leading to worker suicides, layered on top of more negative publicity revolving around the antitrust probe (and subsequent fines) of trying to control ebook prices. Also, secretly GPS-tracking iPhone users was decidedly not cool. Remarkably however, the turning point in how the company was perceived by the public was Apple's own legal win over Samsung for patent infringements delivered in a courthouse just a stone throw from their headquarters by a sympathetic Silicon Valley jury and a judge that should have disqualified herself from presiding over the case in the first place. In the blink of an eye, the totally casual, trend setting, Steve Job's gang from Cupertino, who brought us all these glitzy "must have" products, had evidently switched from looking cool in Agave jeans and Ray Ban shades to wearing banker pin-stripped suits and now wouldn't talk to anyone unless a lawyer was standing by their side. Apple stopped innovating and started litigating, with consumers (and their competitors) around the planet stunned to find out that round corners can indeed be patented. Apple was correctly perceived by the public as blocking competition which inevitably leads to better prices for consumers. Combine this with trying to block sales of the Galaxy 3 when clearly that smartphone was gaining favour among American consumers and attitudes towards Apple were changing. Apple was starting to look profoundly uncool.
Margin compression: Patent lawsuits notwithstanding, Apple's success was just too stunning to be ignored by competitors. Their technology was just too successful not to be copied (it was), or altered slightly to get around patent infringement issues, or just simply improved on. Building their products in China ensured that the "copying" would take place all that much quicker. Margin compression is unavoidable, especially as others close the gap in performance and the shine on the Apple brand loses some of its glare. Apple willingly jumping into lower margin market territory with the mini iPad merely confirms their acceptance of future lower operating margins.
Technicals were breaking down: Once the stock started its downward trend, key support levels (200MDA, 50MDA) were breached and any rallies failed to break through neck lines. The result was more selling momentum strictly based on the tale the charts were telling.
An assortment of other factors: a strong advertising campaign by Samsung exploiting the very uninspiring iPhone5 release, experts and consumers alike disappointed with the new iOS6 operating system including the blunder of introducing a map application that they knew clearly wasn't up to par and other more minor factors were all contributing to Apple's misfortunes. The straws were piling on the camel's back, slowly but surely.
Where do we go from here:
Apple will be around for a long time making good products, but not necessarily the iconic leading edge "thinking out of the box" products that we got used to seeing from them. They will be very relevant but no longer infallible. Nothing stays the same, especially their leadership which has recently openly displayed signs of fracturing leading to several high profile terminations. The competition doesn't stay the same either and neither do fickle consumer tastes. It all amounts to a great deal of risk. No one can say for certain where the stock price will end up, too many volatile variables to consider and weigh properly. My view is that aapl will trade in the mid 400s next year and after bouncing around a bit settle trading in the mid 400s range for some time. Those late comers to the party who bought around the top will have to endure a lot of pain. Apple is an epic success story but if the markets have proven anything over time is that no company should be considered invisible.
P.S. Could aapl trade over $1,000 some day? Count on it, but just not for the reasons every sell-side Wall Street wh0re was spewing. What they didn't tell you is that a loaf of bread will be ten quid when that happens.
You mean somebody actually read it in full ?
Amazing.
I got to the bit about the FED. The I rolled my eyes and aborted.
Have I missed out on anything new or useful ?
Amazing.
I got to the bit about the FED. The I rolled my eyes and aborted.
Have I missed out on anything new or useful ?
We should be honoured. A genuine master of the universe posting to himself on this little ole forum. When will Warren Buffet put in an appearance? 
Come on for FFS, this thing has been up all day.
No counter points???? From anyone?????
Only the halfwit who has nothing to say but wants to say it loud and often. The POS who keeps getting attracted to my posts like a moth to bright light.
No comment from the "passing through" psychopath who got stuck in the mud on here and can't leave. None from any of his aliases. WTF?
How about that Contrarian1234568789 chap and his intelligent dog? Nothing either?
Oh, the humanity....
No counter points???? From anyone?????
Only the halfwit who has nothing to say but wants to say it loud and often. The POS who keeps getting attracted to my posts like a moth to bright light.
No comment from the "passing through" psychopath who got stuck in the mud on here and can't leave. None from any of his aliases. WTF?
How about that Contrarian1234568789 chap and his intelligent dog? Nothing either?
Oh, the humanity....
I can't be bothered. Can anybody tell me if it says anything other than buy gold and this sucker is going down?
My bad, I was posting, I didn't see the psychopath jump from behind the curtain again to complete his comedy routine with the other POS halfwit
Tell me Melly. When you look in the mirror do you kiss your biceps and call them your guns?
So, you don't understand it then.
Color me not surprised.
When is your "passing through" ending by the way. A female dog would have given birth by now it has been so long. Or perhaps she already has......
Color me not surprised.
When is your "passing through" ending by the way. A female dog would have given birth by now it has been so long. Or perhaps she already has......
Next time when you show up at a gun fight bring a Howitzer with you not a down filled pillow.
No wonder you raised a white flag and surrendered FFS.
No wonder you raised a white flag and surrendered FFS.
A down filled pillow can be the perfect weapon for taking care of dopes like you while you are still asleep dreaming of shooting your gun.
The size of some companies is amazing - just randomly searching I came across this .
http://wsws.org/articles/2012/sep2012/foxn-s25.shtml
A company the size of Foxconn can only make 1-2% profit on turnover is remarkable, and at one single location they employ 1500 security staff over a staff of 79,000.
The story is mainly about Foxconn exploiting workers, but someone is exploiting Foxconn at those margins. It can't last, can it.
http://wsws.org/articles/2012/sep2012/foxn-s25.shtml
A company the size of Foxconn can only make 1-2% profit on turnover is remarkable, and at one single location they employ 1500 security staff over a staff of 79,000.
The story is mainly about Foxconn exploiting workers, but someone is exploiting Foxconn at those margins. It can't last, can it.
@ bongo
"The story is mainly about Foxconn exploiting workers, but someone is exploiting Foxconn at those margins. It can't last, can it"I
In capitalism, building your products at Foxconn while being fully aware of the worker exploitation, the brutal worker intimidation by management, the dreadful working and living conditions and the many worker suicides is called "maximizing shareholder value". It's sad, but it's true.
Apple is already seeing margin compression (and a lot of other negative things I covered in my post). Their suppliers are waking up that while Apple "goes to the moon" with 40pc margins they are being squeezed for every penny. They'll ask for more even if it's mighty Apple with a sometimes a dual and even triple source strategy to exert more leverage on their supply base.
The market dynamics will lead to margin compression. Their customers are waking up that Apple's products are pricey. They were prepared to pay when Apple offered the "must have" status symbol brand devices. That's changing, and changing faster then most observers thought.
The Galaxy S3 is now the preferred choice over the iPhone in fashion conscious America and Android phones are outselling the iPhone 3 to 1. The iPad mini with its poor screen, but double the price from a Google Nexus7 will turn out to be a strategic mistake in my view. The response will be to drop the price.
Moreover, the strategy of reducing their product cycles to insanely short periods, like they seem to be doing now (rumors have it a new iPhone5S is in the offing in a matter of months and the dust hasn't settled on the iPhone5 yet), is not endearing them to their loyal customer base. Not to mention that the "older" models being replaced are immediately offered at lower prices.
The competition will force them to compress margins. Competitors are not only catching up through "copying" Apple technology, they are actually leap frogging Apple. Apple's approach of suing everyone on the planet wherever there is a court that will listen is effective in slowing down the competition in the short run but backfires in the long run as these competitors are now motivated to improve and innovate.
The market went along for a long time believing in Apple infallibility. The FED helped along with cheap money. The hedge funds piled in. The stock price kept rising. Simple.
Has the market awaken, or is the drop from $700 just a bump on the road to heaven? I've made my views known, you decide.
Have a look:
http://www.macrumors.com/2012/11/12/apple-to-begin-trial-production-of-iphone-5s-for-earlier-than-expected-launch/
http://www.marketwatch.com/story/samsung-hits-apple-with-20-price-hike-report-2012-11-11
"The story is mainly about Foxconn exploiting workers, but someone is exploiting Foxconn at those margins. It can't last, can it"I
In capitalism, building your products at Foxconn while being fully aware of the worker exploitation, the brutal worker intimidation by management, the dreadful working and living conditions and the many worker suicides is called "maximizing shareholder value". It's sad, but it's true.
Apple is already seeing margin compression (and a lot of other negative things I covered in my post). Their suppliers are waking up that while Apple "goes to the moon" with 40pc margins they are being squeezed for every penny. They'll ask for more even if it's mighty Apple with a sometimes a dual and even triple source strategy to exert more leverage on their supply base.
The market dynamics will lead to margin compression. Their customers are waking up that Apple's products are pricey. They were prepared to pay when Apple offered the "must have" status symbol brand devices. That's changing, and changing faster then most observers thought.
The Galaxy S3 is now the preferred choice over the iPhone in fashion conscious America and Android phones are outselling the iPhone 3 to 1. The iPad mini with its poor screen, but double the price from a Google Nexus7 will turn out to be a strategic mistake in my view. The response will be to drop the price.
Moreover, the strategy of reducing their product cycles to insanely short periods, like they seem to be doing now (rumors have it a new iPhone5S is in the offing in a matter of months and the dust hasn't settled on the iPhone5 yet), is not endearing them to their loyal customer base. Not to mention that the "older" models being replaced are immediately offered at lower prices.
The competition will force them to compress margins. Competitors are not only catching up through "copying" Apple technology, they are actually leap frogging Apple. Apple's approach of suing everyone on the planet wherever there is a court that will listen is effective in slowing down the competition in the short run but backfires in the long run as these competitors are now motivated to improve and innovate.
The market went along for a long time believing in Apple infallibility. The FED helped along with cheap money. The hedge funds piled in. The stock price kept rising. Simple.
Has the market awaken, or is the drop from $700 just a bump on the road to heaven? I've made my views known, you decide.
Have a look:
http://www.macrumors.com/2012/11/12/apple-to-begin-trial-production-of-iphone-5s-for-earlier-than-expected-launch/
http://www.marketwatch.com/story/samsung-hits-apple-with-20-price-hike-report-2012-11-11
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