I am putting a sell on Apple. One of the oldest axioms on Wall Street is “Buy on rumor, sell on news.” To anyone who would listen, I recommended buying Apple in the run up to the Mac World techfest. If they had taken my advice, they would have been amply rewarded. Now that Mac World is over for this year, it is time to sell.
Steve Jobs’ Svengali like performance and the take-your-breath-away beauty of the iPhone has deflected the hard questions until now. I would rather sell before the questions are asked or, even worse, answered.
Steve Jobs dramatically announced “From this day forward we’re going to be known as Apple, Inc. We’ve dropped the "Computer" from our name.” With those two sentences, Jobs has declared the desktop computer dead.
Now that the future of Apple is the iPhone, Apple’s valuation might start to trade in line with other mobile handset makers like Nokia, Motorola and Sony-Ericcson. Compared to Motorola, Apple is very expensive at twice the market capitalization with less than half the sales volume. Put another way, Apple is trading for a whopping 27 times earnings while Motorola is trading at 14 times earnings.
The first product that Jobs discussed in his presentation was Apple TV. This is the description of it from the online Apple store: “Apple TV automatically grabs the digital media on your computer and makes it available for you to enjoy on your TV." Apple TV retails for $299.
What will I watch on my Apple TV that I can’t watch on my big-screen television with a Tivo, or a DVD player?
Although Apple TV offers 350 television shows and 250 movies, cable offers much more, and more recent offerings too. Under pressure from DVD retailers, Paramount did not include recent releases. I think that Apple TV is a nifty gizmo but not something that I and many others will rush out and buy.
The biggest buzz was naturally reserved for the iPhone. Those that have seen it wax lyrically about the revolutionary design of the 3-in-1 device (phone, iPod, and mobile internet device). Michael Eisenberg of Benchmark VC was more practical and pondered: “The cellphone world is a cut-throat margin business where margins decline overnight. I wonder if Apple will succeed in maintaining margins as Motorola and Nokia cut prices on all new phones.”
How will Apple cope with the markdown in price which will eventually be required, and the pressure to margins? I do not know if they will be able to do what they have done with the iPod. In the iPod’s case, they added more features while keeping the price constant. In effect, later buyers get more iPod for the dollar.
And as for the price, at $499 and $599, I wonder how many teens, who are the most avid buyers of the iPod, can afford the iPhone. When the Mac was introduced in 1984 to critical acclaim, the price was a steep $2495. When buyers experienced sticker shock, huge sales did not materialize. .
Jobs’ defense of the price does not hold water with me. His argument is that consumers normally have to pay $199 for a comparable iPod nano, and $299 for a smart phone. iPhone delivers more bells and whistles for the same combined price.
Maybe some of my pessimism is coming from memories of Apple’s last attempt to enter the cellphone market. Apple, in collaboration with Motorola, produced a phone called the Rokr that could download songs from iTunes. The phone never caught on due to limited storage capacity.
What does the iPhone offer that other cell phones do not already offer, or will offer soon? The answer is not very much. The first-generation iPhone does not support 3G. The touch type keypad is beautiful to look at but hard to use for lengthy emails. Frequent users of other touch-screen phones have complained that it is hard to keep the screen clean.
Since third-party software programs can not run on the iPhone, it is impossible for professionals like lawyers and writers to read documents in Microsoft Word format.
Apple’s stated goal of selling 10 million iPhones by the end of 2008 seems ambitious.10 million units represent 1% of the annual global sales of cellular phones. An analyst at Sanford C. Bernstein said, “Cellphones priced above $300 account for only about 5% of the global market.” With the current iPhone not compatible with the much faster 3G wireless network, Jobs’ sales target even seems unlikely. The impetus to upgrade to3G has been a recent revenue driver for mobile phone makers.
This is the first time that Apple has introduced a product that they do not control from start to finish. Not everyone is happy that Cingular was chosen as the wireless carrier. The flashy new phone brings people in the door but the guarantee of good customer service is what makes them sign on the dotted line.
Lastly, I am concerned about the recent signs of arrogance from Apple and Jobs. Herbert Greenberg of CBS Market Watch wrote, “Apple is clearly in the believing-its-own-hype stage, with an arrogance that comes from success but an arrogance that can also lead to failure not as in failing as a company, but creating a level of hype and anticipation that can ultimately work against shareholders if all doesn’t go just according to plan.”
I am a little shocked that Apple went ahead and used the iPhone name without agreement from Cisco. In light of their prior trademark infringement victories against the Beatles over the name Apple, I understand their confidence but deplore their lack of caution and humility. If Cisco prevails, the cost of a settlement to Apple could be hundreds of million of dollars. Although the publicity of the case would keep the Apple phone in the public eye, it would still hurt Apple to have to change the name of the iPhone.
The Teflon coating around Steve Jobs has kept the stock options scandal at bay. But the coating may be peeling. Apple stockholders need to know that there is a remote possibility of an Apple without Jobs. Initially, the market would react very badly to that news.
While applauding Apple’s innovation with one hand, it is time to take profits with the other.
Laura Goldman worked on Wall Street for over twenty years for such firms as Merrill Lynch and UBS Warburg. She now runs her own investment advisory, LSG capital, from Tel Aviv.
The views she expresses are her own and do not necessarily reflect those of "Globes".
Published by Globes [online], Israel business news - www.globes.co.il - on January 23, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007