Last week I initiated a short in Apple (AAPL) -- and I added to my short on both Wednesday and Friday.
Here is my investment rationale:
1. While the Apple eco system remains formidable (no surprise, a "known known"), the company's near-term fortunes (sales/profits) are heavily dependent on the unpredictable pace of the Zero Covid Policy in China. Indeed, supply-chain challenges represent the most important risk to Apple in years.
2. The company's reliance on China to source much of the manufacturing of its core product holds fundamental and valuation risks.
3. Unfortunately, manufacturing sourcing issues (at Foxconn) can not be solved overnight -- the lag time to replace China's sourcing is relatively long, and measured in years, not months.
4. Significant sourcing changes from China could not be effected until late 2024 at the earliest.
5. The business cycle is turning down.
6. Unemployment is likely to rise, consumer savings are dwindling and consumers' elasticity of the demand to a $1,400 smartphone will almost certainly be tested in the quarters ahead.
7. The absolute level of interest rates ("higher for longer") remains an ongoing threat to high valuation and "growthy" equities, like Apple.
9. Apple faces the same streaming challenges -- "profitless prosperity" of higher content costs, rising competition and operating losses that other companies with weakening share prices face (e.g., Warner Bros. Discovery (WBD) , Paramount Global (PARA) and Disney (DIS) ) yet Apple's share price has hung in. On this score, Apple might be forced to make a sizeable and costly streaming acquisition to gain critical mass/share. Investors may frown on this!
10. For some of the reasons mentioned above, Apple is unlikely to meet consensus expectations for revenues/EPS over the next 3-4 quarters.
(This commentary originally appeared in Doug Kass's Daily Diary on Real Money Pro on November 28. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and daily columns from Paul Price, Bret Jensen and others.)