"For everything there is a season, and a time for every purpose under heaven: a time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted; a time to kill, and a time to heal; a time to break down, and a time to build up; a time to weep, and a time to laugh; a time to mourn, and a time to dance; a time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing; a time to seek, and a time to lose; a time to keep, and a time to cast away; a time to rend, and a time to sew; a time to keep silence, and a time to speak; a time to love, and a time to hate; a time for war, and a time for peace."
-- Ecclesiastes 3:1-8
As it is said in the Bible injunction, to everything there is a season. And this winter season has enveloped Apple (AAPL) - after the disappointing lowering of guidance after the close of trading on Wednesday. (Here is a solid summary from TheStreet's Eric Jhonsa.)
Companies (particularly of a hardware-kind) and even sports legends have finite life cycles and careers that never continue forever.
I recently warned that the one of the core problems facing the U.S. stock market was the maturation and expanding problems at Apple and in the ecosystem of Apple suppliers - from "The Top Ten Reasons We May Be Entering a Bear Market" on December 10, 2018:
#6 The Apple Complex (and its Suppliers) Have Been Upended By a Maturing High-End Smart Phone and Weakening iPhone Market and the Social Media Space is Under Increased and Costly Regulatory Scrutiny: These factors have a broad impact on the market leading technology stocks and for the market as a whole. Moreover, over the last decade technological progress has outpaced regulatory supervision - but this is now being reversed as the social media companies now face the existential threat of rising regulations. The costly imposition of regulatory oversight is something I https://realmoney.thestreet.com/dougs-daily-diary?published[value][date]=2019-01-03&author=All#the-end-of-the-g-20190103have been writing about for over a year.
(For a more in-depth summary of Kass's take on Apple, see here)
The Warnings Were Conspicuous
The signposts were there (but were ignored by many, including Warren Buffett and Berkshire Hathaway (BRK.A) (BRK.B) ) - starting with the persistent supplier weakness over a month ago and the company's decision not to provide unit guidance going forward. (It was almost like management knew a big unit miss was coming (from slowing demand and excess inventory) when they issued their most recent - and far too optimistic - guidance.
There were also signs of an elongated iPhone replacement cycle (in China and around the world) - also ignored by many.
The Apple "miss" notes are rolling out this morning, but surprisingly the numbers are still being hockey sticked in the out quarters and into next year.
As Grandma Koufax used to say, "Rotzaruck!" It remains likely that more misses and estimate reductions may lie ahead. (I don't buy the China spin - a miss of this magnitude likely includes developed markets weakness).
I see no reason to buy Apple and get in front of the share price decline unless a material new product offering (very unlikely) is delivered.
On the basis on total market cap and price to sales, Apple, a hardware company, is still not inexpensive. And there are no apparent short-to- intermediate term catalysts.
As to the widely heralded "sticky" installed base, the next big thing for Apple is likely a slowdown in services.
Apple is in a pickle with 60% of the company experiencing shrinking revenue.
Apple has been losing market share globally for years and not innovating for years as well, besides price gouging innovation (as it pushed the envelope of demand elasticity by ever increasing its ASPs). Wall Street analysts and investors looked through this because sales were expanding. But now, with contraction comes pain and the reality that the company's business cycle has passed its best days.
Apple seems to have two choices - neither is good for the stock. Handsets are no longer cool. Apple is no longer a status symbol. The company can keep average selling prices where it is and keep losing market share and eventually become less relevant.
Or, Apple can cut their selling prices in an attempt to get market share back.
Neither will help EPS over the next year or two.
Apple has made a mistake. They should have focused more on share and not exclusively on ASPs. Share is what matters in an industry like this, especially when trying to grow a services annuity. You want an installed base to do that.
As things stand now, a shrinking share of a hardware company that hasn't innovated - trading at 10x EPS looks generous looking at history. But, because EPS will keep getting worse like it does for nearly every hardware and computer company that gets themselves on the wrong side of things (too high priced products) in a mature industry.
As always here are some observations, while we learn some more lessons from the Apple experience:
* Be skeptical of company buybacks - they are often executed poorly (near the highs) and they are almost always a signpost of a maturing company
* $1 of cash should will never be valued as $1 in the market because history shows some of the cash hoard will be pissed away (and it was in ridiculously high buybacks at Apple)
* Be skeptical of unanimity of investment opinion ("groupstink") - until recently Apple was a large percentage of the Indices, the accepted "market leader" and there were a preponderance of buys over sells (virtually none) from Wall Street's research departments
* Don't automatically follow the "whales," even Warren Buffett's Berkshire Hathaway (which has lost more than $20 billion on Apple's shares from its peak price four months ago)
* Study history (specifically, the history of hardware/computer company "life cycles") - as they have a finite shelf life and they almost always end badly
* Be wary of non rigorous analysis - always do your own homework
* Does anyone believe the aggregate S&P 2019 EPS estimates held by the consensus?
(This commentary originally appeared on Real Money Pro on Jan. 3. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)