The Apple Sell-Off is Just Beginning

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I've made the case several times that Apple Inc. (Nasdaq: AAPL) was over-cooked, most recently last fall when the company was flirting with $700 a share.

Each time I did I was taken to the woodshed by the legions of Apple fans who couldn't reconcile their passion with their profits.

iHere we go again…

Following earnings that "beat" and revenue that fell short, the company dropped $48 billion, or roughly 10%, in afterhours trading on Wednesday. And still more on Thursday in early trading.

I think this is just the beginning of a protracted sell- off and my argument really isn't that fancy. In fact, it comes down to two very simple points:

  1. The iPhone isn't the only game in town;
  2. The iPad isn't the only tablet, either.

Competition is heating up around the planet and that's leading to significant margin compression in Apple's product set. Even if the Street has not yet recognized this explicitly, I think that it's only a matter of time before it does.

I know Apple's just beaten the Street yet again, at least when it comes to earnings ($13.07 billion versus $13.06 billion a year ago), and that revenue increased 18% to $54.51 billion versus $46.33 billion a year ago.

But, so what.

No business – I don't care how hyped or how rabid the customer base is – can escape the inevitable impact on margins and revenue that comes from higher competition, higher costs and fickle consumers who are less and less enamored with all things "i" every quarter.

Component costs are already high and getting higher. Growth is stalling. It's "over owned," to borrow a phrase from DoubleLine CEO Jefffrey Gundlach, who believes like I do that the stock will trade lower this quarter. His target is $425 while mine is a bit lower at $400 and change.

According Bloomberg, Wednesday's numbers were the slowest growth figures Apple has posted in 14 quarters.

The Apple Double Whammy

Like other manufacturing concerns, the double whammy means that the ongoing margins associated with each new Apple product are becoming smaller. Over time, of course, those go down as production lines ramp up and economies of scale come into effect, but that's really a short-term game. Apple cannot perpetually introduce products with rising costs and reasonably expect the markets to absorb them as fast as they once did.

If costs are rising faster than revenues over time, sooner or later the two flip and earnings get nailed. There's not a company in the world that can escape this eventuality.

Additionally, CEO Tim Cook is finding out the hard way that Steve Jobs' business model really doesn't account for much absent Jobs himself. Coming into Wednesday's announcement, t he company had missed estimates for 3 of the past 5 quarters. Now, this makes 4 for 6.

Apple has changed. When Jobs ran the place, it oozed innovation. Now, it oozes MBAs and it risks the same sort of "deadening" process that has plagued Microsoft (Nasdaq: MSFT) since Steve Ballmer took over.

Then there's the product suite itself. This time last year the hype was all about stuff that didn't exist. Somehow, at least according to Apple anyway, the uninitiated masses were just going to fall all over themselves with mini-iPads and yet more iPhones that are comparable to offerings from other companies like Samsung and Motorola and driven by Google's And roid platform.

That's part of the problem. In order to recapture what it used to be, Apple products shouldn't be comparable to anything.

They should be game changers. It's no wonder people haven't swarmed the stores like they used to. How many mini- anythings does anyone need?

At some point, a smart phone is a smart phone is a smart phone…until Apple makes it something else or, as the risk is now, somebody beats them to it. I'll reserve judgment for Apple TV, but so far it, too, is just vaporware.

So How and When Do You Short Apple?

That depends on your perspective. Tactically speaking, Apple's a short-term trader's dream.

Expensive and marginable, it moves a lot. That means there's opportunity in both directions.

If you're one to trade earnings announcements, here's something to consider. Birinyi Associates noted to CNBC that Apple stock has "gained 70% of the time in afterhours trading on the day it reported" but 68% of the time it's closed lower on the following day by a half a percent on average. It's already tanked as of press time, so these numbers appear pretty much worthless except as a frame of reference.

I think the more attractive price action on the short side is longer-term. I expect Apple's shares to generally trade lower through the balance of the year.

Absent some real innovation, I believe the iPad/iPhone combination will continue to lose valuable consumer ground both in terms of appeal and utility. I see this translating into reduced product appeal that directly impacts product introduction cycles and slows revenue growth.

In that sense, the real news is not what happened this earnings cycle, but the ones that are two — even three –quarters from now, when gross margins are under real pressure.

It's no wonder, under the circumstances, that Apple guided lower again and declined to provide a profit forecast. I think they know it, too.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. PoliTecs | January 25, 2013

    Finally, someone telling the TRUTH about Apple!

    This brand has been a 'pop-cult' brand for far too long. I just cannot believe they have made it this long before a correction.

    My grandfather told me one; the fuel to freedom is oil, that fuel powers the engine which is business… what runs business? WINDOWS! Not Apple!

  2. H. Craig Bradley | January 25, 2013

    IS APPLE FINISHED YET ?

    Apple T.V. was Steve Job's "last project". Did he finish it or leave it half-built before he died? Does it still have (fatal) bugs that will be in the initial release later this year? ( Do a Boeing). Will Apple come out with a NEW, revolutionary product that changes (simplifies) the way we interact with television and the internet? Will CEO Tim Cook market it in such a way that it is accepted by the masses like I-Phones? These are the unknowns.

    Right now, everyone is piling on Apple now that it is down saying " Its all over for Apple". They many indeed be right or there might be one last hurrah coming up to surprise all the critics. Can Apple do anything new and bold without Steve Jobs? Many have already decided this is indeed the case. If so, the lights are fading and the stock will go back to $200 eventually as competition runs over them as it has for so many other previous tech giants from 2000.

  3. Dwane Lauinger | January 25, 2013

    Keith:

    I just bought a Mac Book Pro 15.4 inch, on January 13, 2013. I'm going to be 56 years old this May. My concern wasn't trying to keep up with the younger crowd. My concern was having to buy another updated windows based product, Windows 8, and like all past windows applications, help Microsoft test their product at my expense.

    The problem windows based products have, is to keep them virus free, (yearly subscription to anti-virus), to keep the registry fast, (yearly subscription to a performance toolkit), to keep the drives up to date and functioning, (yearly subscription to Driver update), and after awhile I was tired of purchasing a yearly subscription to keep my windows based system running every year. I was spending 150.00 a year to keep my windows based computer going, and the money wasn't refundable? Not to mention the time it took to run my daily, and weekly routines, to run these subscriptions…. An hour in the morning, or more, each day, then on Saturday, or Sunday, I had to run my weekly scans to clean the drives, and remove viruses.

    Since I purchased the Mac Book Pro, I haven't performed these painful scans. I don't have to worry about my yearly subscriptions anymore, if I need an app, I pay for it once, and I have it for life,…and these apps are usually free, or quite affordable.

    More and more of the older crowd, and the business crowd, are making the move to Apple,
    that's why RIMM nearly went out of business….

    Dwane Lauinger
    Calgary, Alberta, Canada

    • 48ozhalfgallons | January 25, 2013

      Interesting…. I made the move away from Apple 8 years ago for the very same reasons.

    • robert | January 25, 2013

      Well, Dwane, I'm 84 and I can see that you don't know much about maintaining Windows. Almost everything you need is available free on the internet or from Microsoft . All you have to do is download it and let it update itself.
      This is just one of the excuses apple lovers use.
      But, you don't have to justify love.
      No, I have not updated to Windows 8, yet. By the time Microsoft quits supporting XP, which I like just fine, all the bugs should be out of Win 8. The relative lack of pretty fru-fru in XP suits me fine. I skipped the Vista option.
      I'm a retired electronics engineer and I repair and rebuild IBM and Lenovo laptops just for fun, and I don't like to spend a lot on software, and I don't buy "apps".
      It is annoying that Win 8 does not include a video codec, but compatible free ones are available.

  4. DaveR | January 25, 2013

    If Apple TV doesn't come out on schedule or earlier or if it has glitches, Apple will be in even more trouble trying to regain its luster and rank. Personally, I think it more probable that Samsung or LG or possibly one of the Japanese electronics products firms are more likely to have a TV product in the consumer market before Apple TV. I cannot envision a lot of people dumping their present large, flat-screen TVs which have excellent picture quality and a growing number of interface features to facilitate use with PCs and hand-held devices via cables and more recently short range RF connections [like BlueTooth works] for an entirely new TV unit from Apple which, of course, will carry a premium price. Maybe if it is capable of producing a full color, high resolution, 3-D hologram image that dances in mid-air for true 3-D without need of special eyeglasses!

  5. skiingfast | January 26, 2013

    After Sam had sung he ate an apple.

  6. electrowing | January 26, 2013

    With a smarter, much faster OS, larger, crisper screen, a smart touchboard that actually works, and secure networking – all at generic pricing – Blackberry is poised to destroy the iPhone this year. That would happen even without a Lenovo JV.

  7. H. Craig Bradley | January 27, 2013

    THE BEST IS YET TO COME

    Apple is "secretly" developing its next new gadget: The "i-Watch" set to debut sometime in 2013. Is this reality and will it make any difference in the trajectory of Apple Stock ( Trendline)? Don't forget Apple T.V. Do we know everything that is in the development pipeline at Apple Headquarters or are we just being played?

  8. Common Sense | February 7, 2013

    Many investment experts,such as Mr. Fitz-Gerald,claimed Apple should be sold two years ago.That would have been good advice for investors who didn't care about missing out on most of the profit that Apple provided its investors.Most of Apple competitors wouldn't have the devices they now sell if Mr. Jobs and Apple hadn't created the incredible devices that companies like Samsung, HTC,now copy. It's true even Rome eventually fell but people like Mr. Fitz-Gerald spend way to much time trying to convince investors that a great company like Apple, who is expected to create a miracle device 2 or 3 times a year, is a $200.00 a share stock. Sounds like somebody missed out on buying one of the best stocks every and is a little jealous of investors who took advantage of owning one of the most innovative, successful company's of our time.

    • H. Craig Bradley | February 23, 2013

      Dear "Common Sense":

      I think you are correct, in a sense (no pun intended). My reasoning is I personally know that Keith Fitz-Gerald is a professional stock trader by background and (20 yrs) experience and an author-financial pundit, as well. That does not mean he is a great stock picker all the time, irregardless of claims to the contrary. As a trader, he prefers active management vs. " buy and hold" which he asserts " does not work anymore".

      A stock like Apple rarely comes along and most people never buy a so-called "10 bagger" (Peter Lynch) anyway, let alone a "100- bagger". My parents were one of them and all of us could have done the same by buying Apple back in the late 1990's and holding for 14 years ( buy and hold CAN work IF you pick the right stocks and don't overpay), but the fact is none of us recognized the opportunity (value) back then.

      Keith is wise enough to diversify his income streams and "make hay while the sun still shines". Besides, everyone has their respective ups and downs- its just part of "life".

  9. H. Craig Bradley | February 23, 2013

    NEW DEVELOPMENTS, NEW EXPECTATIONS ??

    I wonder, does the current court ruling in favor of Greenlight Capital's David Einhorn change the situation a bit? There obviously is considerable and growing shareholder pressure for Apple to find a way to return more of its cash hoard , especially now that the price of its stock is way down off its high.

    A 4%-5% annual dividend rate in this low interest rate environment might attract alot of other funds and buyers who are primarily after income (dividends) and not as much growth. That way, its matters less if Apple ever comes out with a brand new product such as "Apple T.V." or an " I-Watch". This development could raise the price of Apple $50/share, provided the overall market holds up.

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