3 Reasons Bears Don’t Like Apple – and Why They’re Bull

By BA McKenna - September 3, 2012 | Tickers: AAPL, BBRY, GOOG, MSFT, NOK | 0 Comments

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What say you? Apple (NASDAQ: AAPL) bull or bear? There are almost always some solid reasons for both bullish and bearish stances on most companies, Apple included. However, it seems many Apple bears cite reasons that have little to no relevance, in my opinion.  

Here are 3 common bearish arguments and my takes: 

1. iPhone has significantly smaller market share than Google's (NASDAQ: GOOG) Android-powered phones

There are holes as huge as those in the Facebook insider stock ship in this argument. 

The first, by far, is that profit share matters far more than market share. Profits -- or, specifically, cash flow -- drive stock prices; market share does not. 

The chart below shows the global profit share picture for cell phones through 2011 (Apple's position has not materially changed through the first half of 2012). Eyeballing the chart, it's easy to see Apple owns roughly 75% of the global profit share pie. Keep in mind the chart is in percentages, not absolute dollar values -- and the size of the profit pie has been expanding. The iPhone's introduction is responsible for this expansion, as it greatly expanded the size of the smartphone piece of the cell phone market.

The chart also clearly shows Nokia's (NYSE: NOK) fall, which was as fast as the iPhone's rise. Apple and Samsung ("Sam") are feasting at the profit pie table, while a couple others, such as Research-in-Motion (NASDAQ: BBRY), are fighting for the few falling scraps.  

HTC = HTC Corp.; LG = LG Electronics; SE = Sony Ericsson; Not sure what co. is the eight -- it's represented by a tiny green sliver between Nokia and Sam at the Q2 2010 mark.

(As for smartphone market share, the figures through 2Q are: 68% Android-powered devices, 17% iPhone, and 15% all others.) 

Another weakness in this argument is it often compares apples -- or Apple -- to oranges. There is only one phone, the iPhone, running on Apple's iOS, whereas there are various phone models produced by a few manufacturers that are powered by Android.   

2. Apple's market cap is so huge that the stock is "due" for a fall

Apple's market cap is $632 billion. Apple just surpassed Microsoft (NASDAQ: MSFT) as the largest company in U.S. history (pre-inflation). On August 20, Apple's market cap hit $623.52 billion; Microsoft's peak valuation was $616.34 billion in December 1999, just before the dot-com bubble burst. (Apple stock has to hit about $900 per share to surpass the inflation-adjusted market cap of Microsoft at its peak.) 

As a point of comparison, here are the market caps of some other tech biggies:

• Microsoft: $257 billion
• IBM: $223 billion 
• Google: $219 billion 
• Samsung: $182 billion
• Amazon: $110 billion 

There is nuance to this rebuttal. Apple's size does, indeed, make it much more difficult (impossible even) to continue growing sales and developing new products at the same torrid pace. However, that's a different line of reasoning than stating Apple's stock is "due" for a fall simply because the company has reached a certain market cap or because it now has the largest market cap in U.S. history (again, pre-inflation). 

The "Apple is due for a fall because its market cap has reached X, Y, or Z" argument has popped up for awhile now. It seems Apple stock missed the memo -- it's up 73% in the past year, and 65% YTD 2012 (to Aug. 30).

There are those comparing Apple's stock today to Microsoft's stock in 1999. Other than the non-inflation-adjusted market cap size, I see no similarities. Microsoft's stock was selling at a very lofty valuation and, like many other tech stocks, was over-priced during the dot-com bubble. So no surprise it dropped significantly when the bubble burst. There are no metrics --PE, PEG, P/FCF -- indicating we could be in tech bubble 2.0 and/or that Apple's stock is over-valued. In fact, most valuation metrics -- notably PEG -- point to Apple's stock being under-priced. 

3. Android is 'better' than iOS (or the BlackBerry is 'better' than the iPhone)

These are highly subjective opinions, not support for why Google's stock is a buy and/or why Apple's stock will fall. (Or why Research-in-Motion will awaken from its coma and be able to execute. RIM's only hope, in my opinion, is to be bought out.)

Points on this one:

• The 'best' tech does not necessarily make for the best stock market investment.
• The 'best' is usually relative.
• You are not the market -- the majority is the market.
• The stock market is not "wrong" over the long-term -- it just 'is.'

It's easy to have a soft spot for a company if you favor their gadgets and gizmos -- and favoring a company's tech is a great way to identify "potentially" good investments. However, it in and of itself is far from enough to make that company a good investment.

Foolish Bottom Line

Even if you favor Android over iOS, why do yourself a disservice by not considering Apple's stock? And vice versa for iLovers and Google's stock. Sure, Apple and Google compete in some arenas, but far from all. And it seems they both have some great things going -- and in the works.  

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