Thursday, July 17, 2008

Hot To Short Apple

I'm not sure of these articles are just link-trolling -- after all, announcing Apple as a short is kind of famous for attracting vitriol -- but to see a couple of them back-to-back is interesting.

A writer at Seeking Alpo, claiming to be an investor and not a speculator, nevertheless says he's shorting big into Apple's earnings release. The author doesn't explain why his thesis about margins or investor sentiment should be considered more than idle speculation, unfortunately, so the take-home message (Apple is volatile due to emotions, and thus will crash hard when margins lead to earnings disappointment) is somewhat challenging to accept.

On the other hand, a poster I've not previously seen appeared at Investor's Hub to tout AAPL as a short premise, based exclusively on charts. To his thinking, the charts portend a bearish future leading into the forties. He doesn't seem to be thinking about the hundred and forties, mind you, or a stock split. He's apparently thinking Apple will drop to a quarter of its price, after looking at lines he drew on charts.

I on the other hand have no idea what will happen to Apple's stock price. I do note that Apple's Mac sales are climbing at over thirty percent a year (comparing quarters with year-ago quarters), and Apple's efforts to increase iTunes sales have resulted in the online music store eclipsing Wal-Mart as the leading U.S. vendor of recorded music by volume (hey, a pun!), while it succeeds in displacing a slew of entrenched rivals to offer the most desired phone.

Folks can kvetch if they like about iPod cannibalization by iPhones, but let's be serious: how can you be upset about upselling a customer to a device that also offers software and service revenue shares? (and is more expensive, and has higher margin, and has the same chance of selling music, but perhaps better because it can sell music while you're walking around away from your computer...?) Every iPod turned into an iPhone sale is a victory for Apple.

If Apple's margins fall because low-margin products like music for resale have exploded, but it adds to Apple's bottom line slightly, it's not a net loss but a gain in profit. The only loss Apple would experience is if in Apple's established, profitable businesses there is a deterioration in margins. Apple's apparent pricing power in the component market suggests that Apple is getting as good a price as anyone for components, and the iPhone teardown estimates suggest the new phone has even better margins than the old one.

The iPod isn't the future. It's passed from star to cash cow. Apple will milk the iPod for all it's worth, and it may remain a good business for some time to come (how long did the Walkman sell?), but it's not the place Apple will be seeing the explosive growth for which people want to love tech stocks. If Apple's advances of its development environment into handhelds and into enterprises is any indication, Apple sees the future in the Mac platform. I had a fantasy ten years ago that rack-mounted Unix servers would propel Apple into enterprise, and now it seems the rack-mounted servers will be slipping into enterprises on the coattails of Unix smartphones.

Funny, that.

I am perfectly willing to accept that prices may be irrational from time to time, but I think that Apple's demonstrated growth and the sales momentum it's built for future development portend good bottom-line results. Eventually, the thinking goes, prices rationalize.

Who knows?

I for one will remain long Apple. Heck, for now I intend to remain short Apple puts.

No comments: