Last week was the annual pilgrimage for techno-geeks to the Consumer Electronics Show in Las Vegas and Apple’s MacWorld in San Francisco. Attendees pored over the latest gadgets, including 3D TVs, smartphones and MP3 players. For me the star of both events was the explosive growth in Netbooks: stripped-down PCs that offer simple functions such as email, internet and word-processing. They have been ridiculed by Apple CEO Steve Jobs as “pieces of junk”. But I reckon these cheap devices could be the worms that finally eat away at Apple’s core. Let me explain.
Apple (Nasdaq: AAPL), tipped as a BUY by Collins Stewart
Apple’s success has been down to its ability to combine stylish design with easy-to-use technology. But times have changed. As budgets have shrunk, fewer people can afford expensive Mac PCs, iPods and iPhones. Netbooks typically sell for less than $500 each, while most Macs cost well over $1,000 a pop. I suspect this down-trading will also spread to the firm’s pricey music players and mobile phones. If I’m right and being expensive becomes uncool, Apple is in big trouble. Sooner or later the board will be forced into a savage round of discounting and/or launching its own range of low-cost gadgets. Either move could crater its juicy 19% operating margins.
Also, from an innovation standpoint, there was a distinct lack of any new jaw-dropping gadgets at MacWorld. Past conferences have launched the iPod, iPhone and the envelope-thin MacBook Air. This year the pipeline was relatively threadbare – and without new products to stimulate demand, I can’t see consumers being willing to splash out on top-dollar Macs.
Apple isn’t going bust anytime soon: it has around $24bn of net cash to weather the severest of storms. But my major gripe is its mix of weak fundamentals, tough targets and stretched valuation. Wall Street expects 2009 sales and underlying earnings per share of $36.3bn and $5.08 respectively, rising to $42.2bn and $6.08 in 2010. So not only does the stock trade on hefty earnings multiples of 16.8 and 14.1, but the group is setting itself up for a fall in having to deliver a 20% rise in profits next year. This is tough at the best of times, never mind the current climate – especially as its rivals are squeezing the pips on pricing. Just last week Rogers Communications, one of Apple’s largest customers, announced its iPhone sales were down almost 50% from the previous quarter.
Recommendation: SELL at $85.85
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.