The Bear Case for Apple
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
First of all I want to be very clear about this; I hold shares of Apple (NASDAQ: AAPL) in my personal portfolio, it's my biggest position and I have been a proud investor in Apple since 2009. I'm planning to keep my Apple position for a long time, since I believe it's one of the best alternatives available right now, even after the huge run up the stock's had in recent years.
No, there is no mistake in the title of this post, I'm going to highlight some bearish points of view regarding Apple. Playing the devil's advocate can be instructive, and even a necessary exercise for investors. There is no better way to understand the risks involved in a position than trying to fit into the shoes of those who have an opposite view.
Apple has a lot to lose. It has rapidly become the biggest company in the world, and history teaches us that the leaders of today usually become the laggards of tomorrow. It was not too long ago when everyone believed Microsoft (NASDAQ: MSFT) was the unbeatable king of software, and Apple was just a niche company selling expensive products to graphic designers and other kinds of specialized users.
Through a series of outstanding innovations, Apple revolutionized the music, phones and tablet computing industries, and the company regained a big part of the market share it had lost in personal computers. Who would have guessed in the '90s that Apple was going to become the most productive retailer in the US in terms of sales per square foot?
Just like Apple achieved almost unbelievable success in dethroning Microsoft and becoming arguably the most extraordinary growth story of the last years, other competitors could now be in the incipient stages of their own road to glory at the expense of Apple. Google (NASDAQ: GOOG) looks like an obvious threat in that respect.
Android is the biggest smartphone platform in the world, and most Android models are cheaper than iPhones. It's no wonder that Google is doing better than Apple in emerging countries, where income levels are lower and carriers don't subsidize iPhone prices as much as they do in the US. Google launched its Nexus 7 tablet recently, which undercuts the iPad in price and many critics believe it could be a serious threat to Apple's tablets.
These quotes from Joshua Topolsky from The Verge are quite explicit about his opinion: Google’s Nexus 7 isn’t just an excellent tablet for $200. It’s an excellent tablet, period… Believe it or not, the last time I was surprised by a product with those same qualities, it was called the iPad.
At this stage, Google beating Apple in the tablets market certainly sounds like a long shot, but stranger things have happened, and Google is by no means a competitor to underestimate.
Apple doesn't have Steve Jobs to run the company anymore, and that's clearly an important transition to monitor. The company's new CEO, Tim Cook, is a very capable executive who has deservedly earned the trust of analysts and investors, but there is just no way to replace Jobs.
Steve Jobs was the mastermind behind Apple's existence and the company's innovative creations. His particular and polemic leadership style cannot be separated from the company's success story. Expecting the same performance from Apple after Jobs would be unreasonable and unfair to Cook.
Capitalism is inherently dynamic and permanently changing, especially in the tech sector. Now that Apple has become the undisputed leader in its many industries, with history as a guide, it may be wise to look for possible signs of emerging new leaders producing disruptive products and technologies. That's in essence the most consistent bearish factor I see in Apple.
Monitoring that risk is certainly a good idea for Apple investors. But on the other hand, I don't think it's time to sell shares in this company yet. Apple has built a very strong competitive advantage through the quality of its products, the power of its brand and technologies like iCloud, which function as a fabulous customer retention tool.
Sooner or later there is a good chance that Apple will be dethroned in the same way it dethroned Microsoft, but that isn't happening at this stage. Furthermore, from a fundamental and valuation point of view there is still considerable upside potential in shares of the Cupertino giant.
When comparing financial ratios for Apple versus other tech bellwethers like Microsoft, Google, Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY), the numbers look quite favorable for Apple. It has the lowest PEG ratio in the group by a wide margin, and Apple also has the highest profitability in terms of ROE ratio. In fact, at a forward P/E ratio around 11 Apple looks considerably undervalued to me.
Apple may not be able to repeat it past performance or hold its leadership position forever, but it doesn't need to do so in order to justify its current valuation. On the contrary, at current levels and considering that the company hasn't lost any of its growth drivers and competitive advantages, Apple is in a strong position to outperform the markets over the next years.
acardenal owns shares of Apple and Google. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, eBay, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
