Tags: Kass | Apple | bear | concerns

Doug Kass: Don’t Bet The Farm on Apple

Tuesday, 25 Sep 2012 08:53 AM

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While many investors are bullish on Apple, there are good reasons to be bearish as well, says Seabreeze Partners Management President Doug Kass.

“A portfolio heavily weighted to Apple has been a ticket to outperformance,” Kass writes in a note to investors published on TheStreet.com. “By contrast, a portfolio dismissive of Apple's prospects and underweighted the stock has underperformed,” a fact that “does not necessarily hold for the future.”

Kass lists specific concerns about Apple, beginning with quality versus price.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“Apple is now selling less or equal for more money,” says Kass, noting that the company used to sell a better product for more money, but now sells an equal to worse product than does the competition at a higher cost.

In addition, he says, Apple products are getting more complex and similar to Microsoft products.

“Steve Jobs is no longer around to convince consumers that his products are magical,” Kass writes. Also, “there are stories floating around about internal disagreements and power struggles given the unique void created by the loss of a single dominant figure in an unusual corporate structure that he controlled.”

Nor does Apple still have a large ecosystem advantage, he explains. “The first-mover advantage might be lessened or lost if Apple continues to try to do everything on a proprietary basis.”

Moreover, Kass points out, the markets served by Apple are saturated, and consumers might start to purchase products at much lower prices from competitors.

In addition, Apple provides a poor economic proposition for its partners, and potential partners do not trust the firm. “Apple's partners have shown that they can and will shift to the good alternatives that consumers seem to like,” such as the Samsung Galaxy.

Kass also notes that some of the firm’s new products might start to cannibalize older, higher-margin products. “The iPad mini may cannibalize the higher-margin iPad — or just be a neutral at best,” he writes.

While Apple's stock is cheap on a price-to-earnings basis, it is expensive based on other key figures. For instance, the price-to-sales ratio is 4.4, and the total absolute market capitalization is $625 billion. Apple shares on Tuesday fell 2.5% to end at $673.54.

Finally, he explains, Apple’s growing size mandates delivery of more blockbuster products, which might not be so readily available.

According to The New York Times, Apple will become a $1 trillion company on April 9, 2015, at around 11:00 a.m. if it keeps growing on its current path. Some analysts believe it will become the first firm to be valued at $1 trillion as early as Aug. 16, 2013, as more and more people around the world line up to buy computers, iPhones, iPads and other products yet to be released.

“It’s hard to imagine Apple growing any faster than it has grown on both the release of the iPad and iPhone,” says Michael Driscoll, CEO of data and predictive analytics firm Metamarkets and one of the people betting Apple will top $1 trillion in 2015, The Times adds.

Apple’s iPhone 5 had sales for its debut weekend of 5 million, which was short of analysts’ estimates or 6 million to 8 million, Bloomberg reports.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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