Hedge Fund Bulls Vs. Bears: Apple (Nasdaq: AAPL)

By: SumZero Staff | Published: June 06, 2012 | Read Comments (1)

(This is a highly-abbreviated version of a full SumZero report republished with the authors' consent)

Bull & Bear Pitch on Apple (Nasdaq: AAPL)

Source: Uncited Portfolio Manager
Firm: Hedge Fund
Location: Philadelphia, PA
Target Price: $900
Return to Date on Thesis: -7.5%

Source: John Griffin
Firm: Wildehond Capital
Location: New York, NY
Target Price: $400
Return to Date on Thesis: 11.3%

Bull Quick Thesis
Everybody knows, or thinks they know the company, but the more time I spend talking to professional investors about Apple, the more clear it becomes that 90% of those who consider themselves 'informed,' and possibly directly involved in the name, know little about the applicable metrics, growth rates, avenues for expansion, Int'l strategy + growth, etc.

Apple is going to do $45 in EPS for FY ending Sept 12 and $52 for 9/13. Net of fully-taxed cash, it is trading at 11x this year and 9.5x next year's EPS.

This for a firm that just grew revenues at 59%, profits at 94%, Gross margins rose to 47%, with $13Bn sales in China and growing quite rapidly. Apple just released the latest iPhone in China and 20 other countries this year, they are still obviously ramping up. Apple's phone sales were 35.1m or over 4m above analyst estimates. I hate to say it, but most buy-side analysts still 'don't get it' when it comes to this name.

Bear Quick Thesis
From time to time, conventional wisdom becomes very strong about a particular e.g. person or stock. This may be more likely to happen when the person or stock becomes an icon, or when the subject elicits an emotional response or generates a sense of loyalty, or when a critical mass is on the bandwagon, etc. I don't fully understand how and why this phenomenon occurs, but I see that it does occur. And Apple has reached that status.

The conventional wisdom is that Apple is a juggernaut that won't be stopped. And so it may turn out. But it can't be that simple. The reality is there are many potential pitfalls, some of which we can't currently perceive, and some which are in plain view.

1) Apple is dependent upon two products for a large proportion of their revenue. And one of these products is no longer in the rapid growth phase of its lifecycle.
2) Apple requires constant innovation to maintain its growth trajectory, and there are reasons to believe that it is currently in a 'lull' with regards to innovation.
3) Competition will be fierce(r). About 8 years ago, when Apple started its current run, its main competitors were MSFT and the PC makers. Tomorrow, GOOG and others will offer much tougher challenges than MSFT ever did.
4) iTV will not be a significant profit generator for AAPL.
5) Has there ever been a more one-sided trade? I mean who isn't long AAPL? Just who will the next marginal buyer be?
6) Steve Jobs' death was a game changer. Apple succeeded because of the creative genius of Steve Jobs. He can't be replaced.
7) If you believe the market is headed for markedly negative returns over the next 6 months, short AAPL may be a good way to play this. Institutional cash positions are actually quite thin at the moment, and margin debt is relatively high. What happens when the market starts to falter? Investors sell liquid positions that have been winners (most of us would rather lock in profits than 'monetize' a loss).
8) Was the dividend and share buyback announcement actually bullish? Yes, that's a rhetorical question. Normally, when a growth company starts paying dividends, it is saying that it really isn't a growth company anymore.
9) Apple is, and will continue to be, in direct competition with its suppliers. How can that not cause problems at some point?
10) Sometimes, you just have to call "bullsh**." Apple's market cap is now greater than the entire retail sector. Really?

Bull Catalysts
1) New MacBook coming out very soon.
2) New iPhone refresh [new iPad is already out, of course]
3) The increasing importance of China and the rest of Asia. China Mobile is the largest mobile phone company in the world, and they do not yet offer iPhone. China is already 20% of sales and when China Mobile and their 600m customers [six hundred million] get the ability to purchase the iPhone you know they will. In droves. Apple tripled their revenue here.
4) Later inclusions of MS Office for the iPad will make this a category killer for the Enterprise segment and put the final nail in RIM's coffin.
5) I am putting zero value on the hoped-for 'Apple TV' in the next two years. Anything they make from that is pure upside.
6) Apple has still not yet fully ramped up supply of the new iPad. They are not selling it in China, China is stuck with the old iPad 2.
7) Litigation will likely be settled. Both sides are eager to stop paying their lawyers here. If anything, once they settle with Samsung the two of them can focus on crushing RIMM, NOK, Motorola for good.
8) iPod/music is slowing less than people thought.
9) Analysts are of course ramping up their estimates for next Q.
10) Apple is getting literally zero credit for the ability to come up with the next Apple product that is not an iPhone, iPad.

Bear Catalysts
1. Android has been rapidly gaining tablet share, and is on pace to overtake Apple in 2Q12! Meantime, iPad pricing has been declining modestly while costs have been slowly and steadily rising. These developments point to slower top line growth and to margin compression. Indeed, iPad margins have already begun to contract.
2. The story is similar for the iPhone. Competition is increasing, which will inhibit Apple pricing and force Apple to spend more for R&D etc. Again, sales growth and margins should disappoint as a result.
3. There are reasons to believe that it is currently in a 'lull' with regards to innovation. Correct me if I'm wrong, but the latest iPhone was not a significant improvement on the prior model, was it? Additionally, the iPhone is now on AT&T, Verizon, and Sprint. There just aren't many potential catalysts for further sales "jumps". The new iPad wasn't groundbreaking, either. Apple is bumping up against some technological barriers. One is battery size/efficiency. Another has to do with user data cost. Many users of the new iPad blew through their monthly data allowances on their plans in just a few days.
4. Deep recession in Europe, recession in the US, and slower growth in Asia will dull consumer's appetites for discretionary toys. And as foreclosures ramp up again post Robo-signing settlement, millions of people will actually have shelter expenses again. Yes, even Apple is subject to the laws of economics.

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  • Hari Shanker September 18, 2012 edit |

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