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In light of Eddie's recent post on Apple dipping below $500 a share, I thought I'd share an uber-bearish piece on Apple from Bloomberg Businessweek.

In short, a sell-side Analyst from Toronto-based ACI Research believes that Apple is headed to $270 a share in the next twelve months.

Is this complete hyperbole or is his rationale grounded in reality? Let's have a quick look.

The Analyst in question, Edward Zabitsky, is ranked as analyst tracking firm StarMine’s top semiconductor and semi-equipment stockpicker. So, he's not some sort of disgruntled "Analyst" writing angry soliloquies, though he's also not ranked for his ability to judge consumer electronics companies.

Anyway, Mr. Zabitsky's rationale boils down to four points:

  • Competition from Microsoft stemming from a belief that Microsoft can continue to dominate in the workplace and extend that dominance into the home and tablet market
  • Competition from Samsung stemming from the meteoric rise of the Galaxy SIII and Galaxy Note II smart phones and their dominance in the Android market
  • Web Apps gaining in popularity compared to Apps purchased through Apple's ecosystem
  • Faltering leadership since the death of Steve Jobs

Frankly, the only real point I agree with him on is competition from Samsung.

I don't see Microsoft making any serious threatening inroads into the Tablet market with the Surface and they're still having trouble gaining traction with their smart phone software. And, even if you want to argue that their new leadership isn't capable of leading ground-breaking innovation on the same level as Jobs, it's still tough to argue that the company is on a road to losing almost 50% of its market value in just one year.

What do you guys think? Any other super bears on Apple? Or, is this guy a total crank?

Comments (28)

  • mikesswimn's picture

    I'm pretty bearish on Apple but goddamn, $270?!?! Maybe over the next few years, sure, as I agree strongly with Zabitsky on the loss of Steve Jobs will end up being a big problem, but within one year? I don't think so, if for no other reason than $29,129,000,000 in cash & equivalents and short term investments on hand (with about a billion with Braeburn) can do wonders for your stock price if it's put to use (and if you have nothing better to do with it) keeping it above $300.

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • MFFL's picture

    I'm bullish on Apple, but I feel like the idea that their cash position is buoying their share price doesn't add up. They have $29 billion in cash if you include short term investments, but that still only translates to $30 a share. Which seems like a lot, but for a stock currently trading at $530 it isn't much at all.

    "Well that's even more than less than unhelpful." - Jack Sparrow

  • joey joe joe shabadoo's picture

    TheKing wrote:

    Anyway, Mr. Zabitsky's rationale boils down to four points:

    • Competition from Microsoft stemming from a belief that Microsoft can continue to dominate in the workplace and extend that dominance into the home and tablet market

    Aren't the Surface sales dismal so far? Has MSFT released actual numbers? I see Samsung and Google as much more competition than Microsoft...

"Give me a fucking beer", Anonymous Genius

  • In reply to MFFL
    mikesswimn's picture

    MFFL wrote:
    I'm bullish on Apple, but I feel like the idea that their cash position is buoying their share price doesn't add up. They have $29 billion in cash if you include short term investments, but that still only translates to $30 a share. Which seems like a lot, but for a stock currently trading at $530 it isn't much at all.

    $29 billion in cash and short term investments is a monsterous amount of money. But, is their hoard buoying their share price? I'd agree with you, probably not, but if they wanted to use that cash to get the share price up if it's dropping - or something along those lines - they have more then enough on hand.

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • ladubs111's picture

    if you add their off shore cash its about 120+ billion cash. They earn about $1 bil a year on interest from their cash last fiscal year.

  • In reply to MFFL
    DontMakeMeShortYou's picture

    MFFL wrote:
    I'm bullish on Apple, but I feel like the idea that their cash position is buoying their share price doesn't add up. They have $29 billion in cash if you include short term investments, but that still only translates to $30 a share. Which seems like a lot, but for a stock currently trading at $530 it isn't much at all.

    You're exactly right. I hate when people tell me company ABC has $x billion of cash. It means nothing unless expressed on a per share basis, or even better, as a % of the market cap. Investors also typically don't give a fuck about cash unless they think they can get their hands on it.

  • In reply to ladubs111
    DontMakeMeShortYou's picture

    ladubs111 wrote:
    if you add their off shore cash its about 120+ billion cash. They earn about $1 bil a year on interest from their cash last fiscal year.

    That's about ~2% of their earnings. It means nothing. + you can't repatriate that cash without taking a 35% cut. They're not going to do that unless there's a tax holiday.

  • f4tality's picture

    I think there is a clear tendency for sell-side analysts to hyperbole, specially if he doesn't come from a big name bank or research house. I remember we had a couple of sell-side analysts (one used to be fairly well known) doing presentations at my school, and they were telling us how you have to be pretty much all-in on your calls and all white or all black. Their rationale was that if you say something in the consensus you're not adding any value to the buy-side and no hf guys are going to want to talk to you. So you basically have to force the trait in your calls to get their attention. I'm sure if his life depended on it he wouldn't make that call (or at least that price target) as it doesn't make any sense.

  • In reply to mikesswimn
    ct banker's picture

    mikesswimn wrote:
    I'm pretty bearish on Apple but goddamn, $270?!?! Maybe over the next few years, sure, as I agree strongly with Zabitsky on the loss of Steve Jobs will end up being a big problem, but within one year? I don't think so, if for no other reason than $29,129,000,000 in cash & equivalents and short term investments on hand (with about a billion with Braeburn) can do wonders for your stock price if it's put to use (and if you have nothing better to do with it) keeping it above $300.

    If you look at total cash, including offshore cash its a little over $120 Billion dollars. even with getting taxed on that it would still be a little over 90B total.

  • DontMakeMeShortYou's picture

    TheKing wrote:
    In light of Eddie's recent post on Apple dipping below $500 a share, I thought I'd share an uber-bearish piece on Apple from Bloomberg Businessweek.

    In short, a sell-side Analyst from Toronto-based ACI Research believes that Apple is headed to $270 a share in the next twelve months.

    Is this complete hyperbole or is his rationale grounded in reality? Let's have a quick look.

    The Analyst in question, Edward Zabitsky, is ranked as analyst tracking firm StarMine’s top semiconductor and semi-equipment stockpicker. So, he's not some sort of disgruntled "Analyst" writing angry soliloquies, though he's also not ranked for his ability to judge consumer electronics companies.

    Anyway, Mr. Zabitsky's rationale boils down to four points:

    • Competition from Microsoft stemming from a belief that Microsoft can continue to dominate in the workplace and extend that dominance into the home and tablet market
    • Competition from Samsung stemming from the meteoric rise of the Galaxy SIII and Galaxy Note II smart phones and their dominance in the Android market
    • Web Apps gaining in popularity compared to Apps purchased through Apple's ecosystem
    • Faltering leadership since the death of Steve Jobs

    Frankly, the only real point I agree with him on is competition from Samsung.

    I don't see Microsoft making any serious threatening inroads into the Tablet market with the Surface and they're still having trouble gaining traction with their smart phone software. And, even if you want to argue that their new leadership isn't capable of leading ground-breaking innovation on the same level as Jobs, it's still tough to argue that the company is on a road to losing almost 50% of its market value in just one year.

    What do you guys think? Any other super bears on Apple? Or, is this guy a total crank?

    1) Surface and Windows 8 have been a disaster.

    2) Agree that there's competition. I don't think it's a big deal. Plus, it's not like AAPL was previously operating as a monopoly... On the other hand, they had low 20s % share of the smartphone market last year and are up to ~48% this year (U.S. only)... as a bull I would be concerned about what their terminal % share will be. We know the smartphone market continues to grow robustly, so there will be that secular trend, but really the question is how much share they can take

    Also... international opportunity? It's a pretty big deal for these guys.

    3) Web apps are still a tiny %. Won't make a dent any time soon. Stupid argument. Data suggests that their app store is still doing phenomenally well.

    270? The stock is already at 9x FY13 earnings. It's worth 4.5x (assuming #s stay the same... after this round of estimate cuts, don't see them going down much further)? Get the fuck out of here.

  • In reply to DontMakeMeShortYou
    Cookies With Milken's picture

    1) Surface and Windows 8 have been a disaster.

    Surface sales numbers haven't been released yet. No one but M$ knows. Not many people have upgrade from 7 to 8 and those who did got it at $40 or so. Doubt M$ made much on those sales. Most sales of 8 are coming from new computer sales. Really depends how the ultrabook market does this quarter. In the long run I see 8 being a failure but it is still too early to tell.

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

  • grosse's picture

    I am neither long nor short, but wouldn't buy it now simply on the momentum.

    My fundamental concern is that I've seen this story with AAPL before.

    The first computers in my house and in my middle school were from Apple. It had a better OS but was more pricey than PC alternatives. Apple also kept a closed system which eventually killed them. As PC prices fell and stemmed Apple's fantastic growth, software developers were left with the choice of making programs / games for the huge / growing PC market, or Apple's niche. Once competitive PC products were seen as "just as good, but cheaper", consumers bought PCs in droves and AAPL became synonymous with artists and graphics designers.

    Is this the same story over again?

    People buy Apple products b/c they are "the best" even though they are more expensive. Android, MS have or are catching up (Android most popular phone OS). Again, it's a closed system.

    Not that Apple has hit the tipping point yet, but if they can't continue to innovate / excite (no more Steve Jobs), much cheaper but "nearly as good" products running Android/Windows will take share. Then it's a death spiral again as developers focus their attention on the better ecosystems.

    That of course is overly dramatic, but you can see how quickly hot operating systems die by looking at NOK and RIMM.

    So then you get into investor psychology - 9x EPS is the market, so what changes to create incremental buyers? You'd need to have major concerns alleviated.

    Barclay's put out a note recently with the top 8 concerns:
    1. LT margins have weakened - structural or passing?
    2. Competition for iPhone - Android has caught up in quality and at lower price
    3. Competition for iPad - low priced tablets from AMZN, GOOG, Samsung
    4. No "next big thing" - TV not coming, no new categories for AAPL to enter
    5. Concerns over maps - standard of quality/excellence has declined
    6. Mgmt changes - internal discord, dislike of Cook
    7. Production Excellence - product shortages create opportunities for others
    8. Execution risks in vertical integration

    1, 2, 3 - no question that competition is here to stay and you are VERY unlikely to see AAPL return to market shares seen before everyone else jumped in.
    4 - maybe people can get excited here with Apple TV if it does exist, but I'd be a lot more confident if Jobs were still around. Imagine if Apple TV is a flub.
    5 - not my biggest concern
    6 - Cook needs to show AAPL can innovate without Jobs
    7 & 8 - not the biggest drivers of the stock.

    Just my thoughts.

  • In reply to Cookies With Milken
    DontMakeMeShortYou's picture

    Cookies With Milken wrote:

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

    People less willing to pay a premium? Where are you getting this info?? AAPL continues to gain share and sell a shitload of hardware despite relatively minor product improvements. As far as I can tell, people are more willing to shell out a premium for AAPL's mediocre hardware today than ever before in history. They DOUBLED their market share in smartphones year over year. That doesn't tell me that "people are waking up."

    Disclosure: I'm neither long nor short AAPL. I don't cover it. I also don't plan on doing anything with the stock.

  • leveredarb's picture

    does this guy even have a short position on?

  • In reply to DontMakeMeShortYou
    Cookies With Milken's picture

    DontMakeMeShortYou wrote:
    Cookies With Milken wrote:

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

    People less willing to pay a premium? Where are you getting this info?? AAPL continues to gain share and sell a shitload of hardware despite relatively minor product improvements. As far as I can tell, people are more willing to shell out a premium for AAPL's mediocre hardware today than ever before in history. They DOUBLED their market share in smartphones year over year. That doesn't tell me that "people are waking up."

    Disclosure: I'm neither long nor short AAPL. I don't cover it. I also don't plan on doing anything with the stock.

    The premiums I was referring to were in regards to laptop and desktop computers. Smart phones is another game entirely.

    http://thenextweb.com/apple/2012/10/25/thanks-to-i...

    1% increase in computer sales over the year.

    http://www.netmarketshare.com/operating-system-mar...

    3% mac OS market share for laptop and desktop computers.

    Those numbers are positive, but not positive enough to sustain its ~$600 share price. Apple is overvalued imho. You could say that the iphone is whats been keeping apple so hot over the years and you would be correct. The risk is that this massive tech company has all their eggs in the iphone basket. The smart phone market is new, rapidly growing and more competition is entering the market every day. Personally, if I were to invest in apple I would want to see growth across the board and not just in sales of electronic devices that consumers may replace in 1-2 years in favor of the competitions.

    In regards to the M$ Apple comparison. M$ is diversified like a mofo. Phone, tablet, OS, enterprise software, search engine, mail service, web browser, xbox etc.

    As far as phones go, every day google is improving android and samsung readies another flagship monster galaxy phone. The open ecosystem of the android app store allows for more programs to be added and quicker than apple's closed ecosystem and tight controlled app store guidelines for developers.

    Apple takes a ~30% cut of the revenue from an app sold from the store as does google. Google's ecosystem encourages growth in its app store from its semi hands off approach and less red tape than apple. The android app store is programmer friendly in that regard. Downside is that android apps are coded in java while ios apps are coded in C which is more well known.

    Employees of facebook and other companies are being advised to use a windows phone or android phone for personal use to familiarize themselves with the new devices. Market share those products have been enjoying constant growth.

    I'm rambling and don't want to proof read.

    tldr - Apple is facing increased competition across the board. Apple has most of their eggs in the fickle and young smart phone market. Samsung and Google are releasing impressive tech and software every day that currently trumps apples offerings while releasing hundreds of variations of phones throughout the year with constant hardware refreshes. Google play store will grow faster than apple store because there is less red tape - google and apple take the same cut from developers for apps sold.

  • Saul_Villa's picture

    The problem with Apple atm is there inability to get market share in the BRIC country's like they have in Northern America. Google is taking most of it with their inexpensive Android system and as the people get more money they're sticking with it because it's what they're used to.

    Personal wealth is not how much you have in the bank or the worth of your portfolio. But, rather how you've used the wealth to make your life and those around you better.

  • ricky212's picture

    This seems a little premature. There is no evidence to show that any of that is even a distinct possibility.

    Because when you're in a room full of smart people, smart suddenly doesn't matter—interesting is what matters.

  • In reply to Cookies With Milken
    DontMakeMeShortYou's picture

    Cookies With Milken wrote:
    DontMakeMeShortYou wrote:
    Cookies With Milken wrote:

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

    People less willing to pay a premium? Where are you getting this info?? AAPL continues to gain share and sell a shitload of hardware despite relatively minor product improvements. As far as I can tell, people are more willing to shell out a premium for AAPL's mediocre hardware today than ever before in history. They DOUBLED their market share in smartphones year over year. That doesn't tell me that "people are waking up."

    Disclosure: I'm neither long nor short AAPL. I don't cover it. I also don't plan on doing anything with the stock.

    The premiums I was referring to were in regards to laptop and desktop computers. Smart phones is another game entirely.

    http://thenextweb.com/apple/2012/10/25/thanks-to-i...

    1% increase in computer sales over the year.

    http://www.netmarketshare.com/operating-system-mar...

    3% mac OS market share for laptop and desktop computers.

    Those numbers are positive, but not positive enough to sustain its ~$600 share price. Apple is overvalued imho. You could say that the iphone is whats been keeping apple so hot over the years and you would be correct. The risk is that this massive tech company has all their eggs in the iphone basket. The smart phone market is new, rapidly growing and more competition is entering the market every day. Personally, if I were to invest in apple I would want to see growth across the board and not just in sales of electronic devices that consumers may replace in 1-2 years in favor of the competitions.

    In regards to the M$ Apple comparison. M$ is diversified like a mofo. Phone, tablet, OS, enterprise software, search engine, mail service, web browser, xbox etc.

    As far as phones go, every day google is improving android and samsung readies another flagship monster galaxy phone. The open ecosystem of the android app store allows for more programs to be added and quicker than apple's closed ecosystem and tight controlled app store guidelines for developers. Apple takes a ~30% cut of the revenue from an app sold from the store as does google. Google's ecosystem encourages growth in its app store from its semi hands off approach and less red tape than apple. A family member and close friend of mine both work in mobile so my opinion is a bit biased based off of what they've been telling me.

    1) Look at the dismal PC #s this last year. 1% growth from AAPL means they continue to gain share, which means people continue to pay out the ass for a brand name. Nothing surprising there

    2) You realize the $600 share price is irrelevant. It's about the multiple people pay for the stock. You can't say that BRK A shares are overvalued because they trade at $135,700... that's not taking into consideration what the underlying earnings are.

    AAPL is trading at less than 11x NTM earnings. Is that overvalued? Maybe. I can't say because I don't know enough. I can, however, say that your thesis is very, very soft and it's clear you don't really understand what drives AAPL's growth and what investors need to see to get excited.

    3) "Growth across the board?" You expect AAPL to single-handedly turn the PC market around? You realize PCs are a business in secular decline at this point, right? People don't really care about the macbook #s. It's all about mobile (phone and tablet).

    4) MSFT's diversification means they can suck at many things simultaneously. I'd rather own a business that does one thing or several things extremely well. ~75% of their profit comes from their business division (~only 1/3 of sales). What exactly is your point with MSFT anyway?

    5) What you miss is that as long as AAPL can sell phones, developers will be incentivized to create apps for iOS. Simple as that.. Their share gains have continued. You need to get into the head of the consumer, not the app developer.

  • In reply to DontMakeMeShortYou
    ladubs111's picture

    DontMakeMeShortYou wrote:
    Cookies With Milken wrote:
    DontMakeMeShortYou wrote:
    Cookies With Milken wrote:

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

    People less willing to pay a premium? Where are you getting this info?? AAPL continues to gain share and sell a shitload of hardware despite relatively minor product improvements. As far as I can tell, people are more willing to shell out a premium for AAPL's mediocre hardware today than ever before in history. They DOUBLED their market share in smartphones year over year. That doesn't tell me that "people are waking up."

    Disclosure: I'm neither long nor short AAPL. I don't cover it. I also don't plan on doing anything with the stock.

    The premiums I was referring to were in regards to laptop and desktop computers. Smart phones is another game entirely.

    http://thenextweb.com/apple/2012/10/25/thanks-to-i...

    1% increase in computer sales over the year.

    http://www.netmarketshare.com/operating-system-mar...

    3% mac OS market share for laptop and desktop computers.

    Those numbers are positive, but not positive enough to sustain its ~$600 share price. Apple is overvalued imho. You could say that the iphone is whats been keeping apple so hot over the years and you would be correct. The risk is that this massive tech company has all their eggs in the iphone basket. The smart phone market is new, rapidly growing and more competition is entering the market every day. Personally, if I were to invest in apple I would want to see growth across the board and not just in sales of electronic devices that consumers may replace in 1-2 years in favor of the competitions.

    In regards to the M$ Apple comparison. M$ is diversified like a mofo. Phone, tablet, OS, enterprise software, search engine, mail service, web browser, xbox etc.

    As far as phones go, every day google is improving android and samsung readies another flagship monster galaxy phone. The open ecosystem of the android app store allows for more programs to be added and quicker than apple's closed ecosystem and tight controlled app store guidelines for developers. Apple takes a ~30% cut of the revenue from an app sold from the store as does google. Google's ecosystem encourages growth in its app store from its semi hands off approach and less red tape than apple. A family member and close friend of mine both work in mobile so my opinion is a bit biased based off of what they've been telling me.

    1) Look at the dismal PC #s this last year. 1% growth from AAPL means they continue to gain share, which means people continue to pay out the ass for a brand name. Nothing surprising there

    2) You realize the $600 share price is irrelevant. It's about the multiple people pay for the stock. You can't say that BRK A shares are overvalued because they trade at $135,700... that's not taking into consideration what the underlying earnings are.

    AAPL is trading at less than 11x NTM earnings. Is that overvalued? Maybe. I can't say because I don't know enough. I can, however, say that your thesis is very, very soft and it's clear you don't really understand what drives AAPL's growth and what investors need to see to get excited.

    3) "Growth across the board?" You expect AAPL to single-handedly turn the PC market around? You realize PCs are a business in secular decline at this point, right? People don't really care about the macbook #s. It's all about mobile (phone and tablet).

    4) MSFT's diversification means they can suck at many things simultaneously. I'd rather own a business that does one thing or several things extremely well. ~75% of their profit comes from their business division (~only 1/3 of sales). What exactly is your point with MSFT anyway?

    5) What you miss is that as long as AAPL can sell phones, developers will be incentivized to create apps for iOS. Simple as that.. Their share gains have continued. You need to get into the head of the consumer, not the app developer.

    I would also add developers still monetize better on iOS than Android. And I think most of the people in this thread is missing the connection that as long as Apple keep developers really happy, they will continue to develop Apps for iOS which is increase their ecosystem strength as a result lure more customers.

    Also MSFT has not been profitable in their online business for a while, entertainment barely profitable, Windows, Office, Servers/Cloud very profitable but they continue to burn cash on dumb ass overpriced acquisitions that they just end up writing off 90% of it 2-4 year down the road.

  • In reply to Cookies With Milken
    Amphipathic's picture

    Cookies With Milken wrote:

    Everyone is ignoring the main reason why the apple kool-aid doesn't taste as good as it used to. Consumers are getting over the marketing hype. People are starting to wake up that an $800 premium on a laptop with the same internals as any other PC isn't worth it. Apple blew up because they somehow turned technology into a fashion / status symbol. People are just giving less of a shit as each day goes by, or until apple releases something new.

    Well put. The more iphones and macbooks Apple sells to the masses, the more the premium on their products is not justified. You don't see Louis Vuitton selling their handbags at wal-mart, and unlike apple, their products are better built than their competitors.

  • JasonLoh's picture

    Well, I think it is more appriopriate to judge companies such as apple or nokia as a luxury retail stock, as it is now more of fashion.

  • JasonLoh's picture

    Therefore, I am rather bearish on the outlook of Apple as there seems to be a shift in preference from Apple, to other mobile devices such as HTC or Nokia. Thus I am short AAPL and long NOK/RIMM. This would not only express my views as of above, but also render me market and sector neutral.

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  • In reply to ct banker
    mikesswimn's picture

    "My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

  • senoralpha's picture

    Ordering a salad at McDonalds is like paying a hooker for a hug.