Apple: Cash or Trash?

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With Apple Inc. (Nasdaq: AAPL) off nearly 50% from its $705.07 a share high set last September, many investors want to know if it's a buy.

Not in my book. Here's why:

1. The company has held on to its premium pricing strategy for too long. Going out on price as it has recently with iPhones, for example, is the death knell of competitive differentiation. Businesses that engage in price wars have a very difficult time climbing back up the proverbial ladder.

2. The present management team is having trouble fulfilling the late Steve Jobs' vision, and execution appears to be stumbling. The Maps thing, for instance, was an unmitigated disaster and shattered Apple's image of invincibility. The public noticed.

3. Apple has lost its "head start." The company used to be one to four years ahead of everybody else with every aspect of its design, function and software, especially when it came to iPads and iPhones. Now they're lucky to have six months…if that. Apple owned the vanguard in devices. Now it's simply one choice among many.

4. Consumers no longer feel the need to upgrade every time something new comes out. Better, bigger, and cheaper smart phones from Samsung, HTC and other makers have displaced the "gotta have it" drive for everyday people. Diehards and early adopters will never change; it's just that their numbers have gotten smaller as the numbers of those seeking utility have gotten larger.

The Changing Landscape at Apple

Translation?…

Increasing earnings pressure and diminished value in the years ahead.

Apple is doomed to go the way of Intel Corp. (Nasdaq: INTC) and Microsoft Corp. (Nasdaq: MSFT). Both are quality companies, as is Apple, yet both struggle to produce anything even remotely resembling excitement and are trapped in their own legacy. My good friend Barry Ritholtz put it succinctly on Tech Ticker: "Apple is transitioning from a growth stock to a value stock."

The other thing to remember about Apple is it now oozes MBAs, whereas it used to ooze innovation.

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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. david tarbuck | April 22, 2013

    Apple has always had trouble with philosophy, politics and the bean counters not being able to keep up with their magnificent innovators and hands on producers.

    I can remember when several companies wanted to make "apple compatibles"; many of these were hardware applications that would have expanded the *Mac into areas where Apple was not and probably never would be.

    Apple chose to "sue" any and all compatibles for "patent infringement".

    Several small innovators went bankrupt; those that survived apples blind spot vindictiveness or later resurfaced did so by making "IBM, PC compatibles".

    Ergo; the superior *Mac with its operating system lead lost out to the *PC which then became the standard of the world for 30 years or more.

    Rather than being the work of IBM alone, the world of "IBM compatibles" produced by a vast number of silicone valley types (in the valley and elsewhere). The business maturity of the venerable International Business Machines enabled the clear vision of where the profits would come. They could never have produced on their own, the ambient of "IBM compatible", but they were farsighted enough to know when they were getting that rare thing, 'the free lunch'!

  2. EdInvests | April 22, 2013

    I think the author missed a point, or chose to ignore it. Unless Apple is to totally disappear, there has to be some price at which it is a good investment for value, or even growth. The real question is whether all of the bad news is already built in to the current price or even over done. I am far more interested in when the price is finally at an entry point, and it seems that it may be at that level today.

    • Keith Fitz-Gerald | April 22, 2013

      Great point Ed. The absolute bottom will be the point at which buyers outnumber sellers – I just don't think we're there yet and may not be for a while to come because I don't think the future is as bright as Cupertino would like to think it is.

      And David, thanks for bringing that up. Apple chose to shut out the rest of the world at a time that could have led to a very different company today with much more staying power. I think it changed the game forever although many will disagree with me no doubt.

      Thanks to both of you for your time and thoughtful comments. Hope you have a great day – Keith :-)

  3. 48ozhalfgallons | April 22, 2013

    The only positive experience concerning Apple products I had was with my 8600 back in '97. When Jobs returned to Apple and rapidly disposed of the processor and OS, my product experience as a customer went sour. I either had to double down on more soon-to-be-obsolesced Jobsware or turn to Windows which I did. The elitist image and pricing business model coupled with Walmart availability and rapid obsolescence smacks of fad mentality. The depth and volume of the iFad business are remarkable studies in human nature. A new austerity hardened generation of consumers is at hand. Unless Apple can adapt its products to offer economic value (meaning the antithesis of obsolescence) I believe we have another Kodak on our hands.

  4. DP | April 22, 2013

    Author compares Apple to Microsoft and Intel.

    Microsoft started out as a software company, making forays into hardware (Zune, Xbox and tablets) much later in its life.

    Intel started by manufacturing memory and later CPU chips. The latter had plenty of competition from other companies (AMD, National, Fairchild…). IBM's use of Intel's CPU in the PC sealed Intel's destiny as the dominant CPU company it is today. Its CPUs are found in the majority of desktops, laptops, notepads and ultras. Its CPUs also power the majority of servers. It is now making forays into network processing (think Cisco, Juniper…) using CPUs in combination with software. It has recently started making chips for tablets and cell phones. It is a member of the Tizen project, an alternative mobile operating system to iOS, Androrid and WP8. Lastly, but not least, it is a manufacturing powerhouse with the world's most advanced process technology and innovative device structures such as its tri-fin gate MOSFETs.

    DP

  5. H. Craig Bradley | April 24, 2013

    Apple will have a 4% dividend next year, same as Intel. That's pretty good in a low interest rate environment, provided the stock can stablize.

  6. H. Craig Bradley | April 24, 2013

    SOUR GRAPES AND DROIDS

    One analyst recently described the I-Phone as a "premium" (sic. luxury) smartphone which a high-end customer buys as another part of their lifestyle. This is similar to a rich person who buys a Ferrari instead of just a BMW or Lexis. Its a step up above the crowd. Its even an "upper class cellphone"

    Time has shown that very high-end products can command a premium because they have loyal customers with financial staying power. The economy could tank and these high-end customers would still have "disposable" income. For them, the economy does not matter. The national debt is irrelevent. Politicans can be bought, if needed. Everyone else must "take what they can get". The rest of us must buy what we or our business can either justify (on-budget) or afford. In phones that would be a DROID, not an Apple.

  7. H. Craig Bradley | April 24, 2013

    BOYS AND TOYS

    Droid is for plebians, in contrast, Apple I-phones ( a premium product) are intended for the very wealthy who also own a number of other "toys", such as a Ferrari. Ha! Ha! Ha!

  8. H. Craig Bradley | April 24, 2013

    Did "mini-options" play into Apple's decline from $466/share since their release on March 18, 2013?

  9. Roger from MA | April 24, 2013

    IT people often don't like Macs because it threatens their job security. :-)
    Apples users' experience is so much better, as they (Apple) control both the hardware and software. It just works. And free support is readily available in person.

    Online retailers (which I am one of many) will tell you iPhone users spend more on average than other smartphone users on their orders.

    Apple is on sale and is raising the dividend. I'm liking it more and more!

    Cheers!

  10. H. Craig Bradley | April 24, 2013

    INVESTORS AND THE MARKET HAVE A 'HARD-ON' AGAINST APPLE

    You guys at moneymorning.com have absolutely NO IDEA what Apple is up to whatsoever. No idea about the future and your statements are so obviously hedged, as well. "Nothing fresh any time soon" ( Until this coming Fall, that is, according to CEO Tim Cook). The markets currently doubt whether Apple really does have something new up its sleeve.

    The stock still has the potential to surprise to the upside in the intermediate term, but definately not in the short term and probably not in the long term either. So, today its a 'hold', later in the year, maybe a "Buy" again, and sometime in the future back to a "sell" once more. Seems like the market sold plenty while the analysts simply "held" on to their old ratings. Try market timing that!

    The credit ratings agencies (S&P) will not give Apple's pending debt issue a AAA rating because of these "earnings swings". The stock is simply too erratic and volatile for investors or bond rating agencies to get their arms around it. The uncertainty with Apple is so uncomfortable that it is penalized by the marketplace and no longer is afforded the benefit of the doubt going forward, especially without its leader, the late Steve Jobs.

    Apple has traditionally viewed China as a cheap place to manufacture I-Phones and other hardware, not as a high-value market. That may be the biggest change of all.

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