An Apple Bear Changes his Stripes

By Adem Tahiri - November 16, 2012 | Tickers: AMZN, AAPL, BBY, GLW, GOOG, MSFT | 0 Comments

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I don’t get Apple (NASDAQ: AAPL). At least not as a consumer, I never have really. It probably comes as no surprise; I’m a perennial cheap skate whose idea of a “fashionable outfit” is a pair of Dockers and a Polo. I’m always the last to adapt to the newest tech trend, much to the delight of my friends who tease me endlessly for my “old man syndrome.”

In general, when people think of me, the general picture that comes to mind is “George Costanza, with more hair--at least for now.”

But—as an investor, I always had a healthy respect for Steve Jobs. Even though I would never be the person waiting in lines for the latest tech gadget, I understood why they did, it was the innovation. My respect for Jobs and his obsessive passion for innovation is why Apple was always that stock, on the way up that I wish I had the guts to buy. I’m just not that type of hyper growth investor when it comes to consumer products, but that’s neither here nor there.

When Jobs got sick I got bearish on the company, when he unfortunately passed I told my friends to sell and when Apple started acting like the next Microsoft (releasing Apple Maps too early, paying a dividend, etc.) well, I started calling them the next Microsoft.

Besides the “Maps” and “Siri” blunders the biggest detriment to Apple at $700 that I could see was the lack of innovation; the innovator, sadly, has left the building—and his name was never Tim Cook. Innovation is an absolute necessity at hyper growth consumer based firms. Apple, all of the sudden was relying on 4^th and 5^th upgrades of the same thing as its “next big thing,” this was troubling.

Warning—side note: I always have a bit of a chuckle when people make the inference that Amazon (NASDAQ: AMZN) and Amazon alone did Best Buy (NYSE: BBY) in, this could not be further from the truth. Yes! In three short years everyone in the world started buying every product under the sun online? Then why has Amazon’s earnings growth stalled? Don’t get me wrong, I love CEO Jeff Bezos and yes, they did take some of BBY’s market share but the primary culprit (and the reason I’m bringing this up) is a lack of innovation from tech firms did Best Buy in.

In the mid 2000’s Best Buy was the beneficiary of the two big changes in the electronic consumer landscape. People switched from old “boxy” TV’s to flat screens and from Xbox’s to Xbox360’s, since that time no new product “revolution” (aside from tablets) has come out. Best Buys’ big money maker was flat screens, the problem is, once everyone has one—well, they have one. For further proof of this, just look at glassmaker Corning which has seen profits tumble since the demand for new flat screens has died down. Best Buy expanded, opened up new stores, projecting this growth would last; big mistake.

A lack of innovation hurt these firms, a lack of innovation hurt Microsoft, a lack of innovation has certainly hurt Apple which sees its stock just a smidge above $500 these days. But this is not an Apple “slam” piece; in fact it’s safe to say that a lack of innovation is hurting everyone in tech these days. Tech is moving into the kind of slow growth sludgy, cash producing industry that a self-admitted cheap skate like me, has got to admire.

A Bear Changes His Stripes

Yes, I thought I was pretty clever, pretty darn witty indeed a year ago when I told all of my Apple loving friends that they were “becoming the next Microsoft”. The jokes over already! They are the next Microsoft, but guess what? Everyone is the next Microsoft? What revolutionary product is Google or Amazon coming up with lately, that a non “techy” (like me) would take notice of? Tech is moving into its own version of the cola wars; these companies have their hands in everything, generate a ton of cash and aren’t coming out with anything new. They are just going to grow slow and slug it out, so with that in mind, looking at the table above, why not go with the best performing company at the best value?

Microsoft is still a pretty darn good company and Apple still has many advantages over softy. So why in the world is it trading a cheaper multiple than Microsoft? Tim Cook is not Steve Jobs but is he really Bob Nardelli at Home Depot, bad? Of course not.

The House That Jobs Left

The fact is that Apple still sells for a ridiculously low P/EG of 0.49 and analysts are still expecting plenty of growth. Let’s say they are way off, by 50% (nearly impossible) it would still sell at a P/EG of 0.98; still cheaper than that of Microsoft, Amazon and Google, and that’s if the analysts are historically wrong. Does this make any sense Apple sell at such a ridiculously cheap valuation, especially compared to Amazon but also to all three? No.

Apple has been left in a dummy proof situation by Jobs, while I don’t trust it to innovate it has the type of dominant market share in several markets (itunes, tablets) that Microsoft has in Office, which counts for something. Furthermore Apple still enjoys world class “stickiness” throughout all of their product lines, it’s hard to use one without the other; they sell their hardware with their own operating system and so on and so on.

My Two Second Takeaway

Here’s where we are at, for the sake of your psyche I’ll keep it quick and to the point. If you own Apple and you’re thinking of panic selling, stop it! Apple is the next Microsoft, just like the rest of tech, that’s ok. News flash--I’m still wearing Dockers, I’m still un-cool but even I’m not un-hip enough to resist Apple if it slips into the $400 range. If it gets there (say $450 by Christmas) give yourself a present and pick some up.

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