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.

No doubt Apple's business managers are plenty smart, but they've become more cautious, too.

Jobs enjoyed -- even relished -- a certain sense of creative recklessness, and I think that's gone. Apple doesn't seem to embody the same entrepreneurial energy it once had, at least to me anyway.

Anecdotally, I personally shifted from iPhones and iPads to Droid power this year. The price points were better when my team needed new equipment, and the developer market seems deeper. I miss the dependability of my iPad, but not enough to go back.  I can't imagine I'm alone.

We still run a few Apple boxes in our office, but most of the time those are in parallel with Windows emulators because that's where the financial software we need to do our research runs best.

Apple lovers will no doubt take issue with what I have to say and I respect that...Apple is a great company making great products. I just don't think it's a great investment at the moment.

The Apple TV and wristwatches everybody seems to be placing hopes on are non-starters. Consumer purchasing patterns reflect slowing big ticket item buying behavior and tech weariness across the board as the financial crisis and "recovery" wear on.

Besides, I can talk into my smart phone. Why do I need to talk into my wristwatch, too? If anything, I increasingly want to disconnect from all this technology that the twenty-somethings tell me will improve my life.

Big Problems in China

Admittedly, I once thought China would pick up the pieces if Apple dropped from the tree, but now I am not certain. A lot has changed there in Apple's world.

It's not that the Chinese don't love Apple. They do. So much so, in fact, that knockoff artists even created a chain of fake Apple stores so real that employees thought they were working for Cupertino.

But the company has had its share of labor problems and those don't seem to be going away anytime soon. If anything, they're worsening.

That's led to quality control issues and an unprecedented apology from CEO Tim Cook to the Chinese people covering both shoddy repairs and warranty policies. Never mind that what prompted Cook's apology was a ring of Chinese customers substituting fake parts, declaring they don't work, then submitting the phones for replacement and using the repaired phones to build entirely new iPhones for the black market.

Beijing is currently cracking down on Apple's App Store, citing objectionable content, including porn and illegal publications. It's also targeting Apple's operations, especially its servers, which are located outside China and therefore a censorship issue for China's infamous "Great Wall" security network. This reminds me of the Google situation a few years ago.

Reading between the lines, I think there's a "full court press" on.

China has been increasingly reliant on Droid-based technology for the past few years. Whereas Beijing once viewed that as a plus, they increasingly view that as a liability. So they're going to undermine the top dog (i.e. Apple) in an attempt to create more competitive elbow room for home-grown companies like Lenovo (PINK ADR: LNVGY) and Huawei.

Apple's penchant for secrecy isn't helping much, and the company has been eviscerated by obviously planted stories in that nation's national media about customer discrimination, corporate hijinks and patent challenges.

Team Cupertino is also defiant. Let's not forget that Apple pulls down approximately $1 billion a week. It's only natural now that Beijing's figured out how much this has "cost" their manufacturing base -- and they want a bigger piece of the action.

Apple historically has not cut the pie. And, unless they learn to do so quickly, rising Chinese nationalism may undermine Apple's leadership position on top of its profits.

Finally, what about all that cash?

Apple's got an estimated $150 billion in the bank. Columnist Henry Blodget - yes, that Henry Blodget who famously got banned from the securities business for issuing a glowing recommendation of Apple while privately referring to it in an email as a P.O.S. - makes the case that you could effectively buy the company today for less than $390 billion, wait a few years and essentially own everything free and clear.

I don't disagree...what I have a problem with is that I don't think Apple's earnings are going to support the equation needed to meet Blodget's expectations.

Higher fixed costs + higher manufacturing costs + lower pricing = lower margins and lower earnings.

No...I would not buy Apple.

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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.

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