Thursday, May 2, 2013

Meet One of the Few Analysts On Wall Street Bearish on Apple

According to FactSet, 80% of the 54 analysts who follow Apple rate the stock a "buy". 

While I don't have the data to prove it, I suspect that many of these analysts were equally enthusiastic about the tech icon when the stock was trading +40% higher than today's levels.

I don't mention all of this to be critical.  As I have written in several posts about Apple, this has been one of the hardest stocks to analyze in my career.

The company has all of the characteristics of a growth company - and trades at levels that make most value managers pay attention - yet the stock has disappointed since last fall.

Part of the problem for the analyst community, I think, is that many have been following Apple for years. They have witnessed first hand how the company has transformed the way the world lives.

Nearly 3 billion people globally, or about 45% of the world's population, are connected to broadband via a mobile device, and Apple has been the leader in this technology revolution. Personal computer sales are in a free fall due to the huge growth in tablet usage, led by Apple's introduction of the iPad a few years ago.  Steve Jobs has become an iconic figure even after his passing, and for good reason.

So what's wrong with the stock?

Glen Yeung at Citigroup has followed the semiconductor space for years, but only started following Apple last year.  Perhaps because he brings a fresh perspective to the stock, Glen has become one of the most vocal doubters on Apple. I had the chance to hear some of Glen's thoughts in person yesterday.

Glen is officially "neutral" on Apple, but my sense is that he would not be a buyer of the stock here. 

The problem Glen sees for Apple is that while its products are terrific, they are also very expensive relative to the alternatives. 

The iPhone 5 sells in the $600 to $700 range (unless you sign a two year contract with a telecom company). Samsung's Galaxy S3 is $100 cheaper with equal or better performance characteristics, according to Glen.

More ominously for both Apple and Samsung, Chinese cellphone manufacturer Xiaomi is offering smart phone named MII2 that is priced at half of the Apple iPhone.  For around $300, then, Chinese purchasers can get a device with essentially the same performance as Apple's.

Since Citi estimates that 84% of smartphone growth in 2013 will come from China and other emerging markets, Apple has some serious challenges in the fastest growing parts of the market.

Apple's iPad also faces pricing pressures from other manufacturers, primarily Samsung.  Moreover, Apple's iPad mini with its 7 inch screen is apparently seriously impacting sales of Apple's regular iPad,  Since the company makes more on its larger models, Apple in some ways is cannibalizing its own sales.  Glen does not expect this trend to reverse.

Citi's overall view on smartphones and tablets is that the innovation curve has reached its peak.  Sales of mobile devices will continue to grow, but the growth will come in lower-priced models which offer enough capacity to satisfy most consumers. 

Glen is not ringing the death knell for Apple, however. He thinks the real opportunity for company will be in software. When Apple introduced iTunes ten years ago, they revolutionized the music industry, and created a whole new source of demand for its products.  If they can develop new uses for its hardware, Apple could see a resumption in growth.