Carlo R. Besenius, CEO of an independent research firm Creative Global Investments is out with a new report on Apple Inc. (NASDAQ:AAPL) recommending a sell/short on Apple Inc. (NASDAQ:AAPL), with a price target of $475.80. The report is extremely interesting, and we think that many times independent research is superior to brokerage research. Josh Brown of The Reformed Broker has an excellent article on why independent research is more accurate than brokerage research.
Carlo starts out with a chart of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) from 1994-2001 and Apple Inc. (NASDAQ:AAPL) 2008 – 2013; the charts look extremely similar. Carlo notes what happened over the next ten years for Nokia and gets into technical analysis. However, we are fundamental based and will look at some of the company specific arguments.
According to Carlo when looking at the fundamental picture of Apple Inc. (NASDAQ:AAPL) and it’s current product portfolio situation versus the competition:
• The iPhone is no longer the best and the only great smartphone
• The iPad & iPad Mini are no longer the best and the only tablets
• The iMac & iMacPro are no longer the only failsafe and most secure laptops
• The iPod’s are no longer the best, fastest and with most capacity portable media players
As his firm has written since October 2012, Samsung, Android, Research in Motion (Blackberry), Nokia, and many others have allowed for Apple to have been the game leader and game changer, racking up highest profit margins in all of their product lines for a long, a very long time, however, since 2012, they all have “reacted” to Apple Inc. (NASDAQ:AAPL)'s business model and product portfolio with their own upgrades, technological innovations, new product design, software applications, software operating platforms, and are here to make life much more difficult for Apple Inc. (NASDAQ:AAPL) in the coming years.
All of this is leading to more and more “iMargincompression” in Apple's product portfolio.
– Component costs are rising continuously and cutting into margins.
– Apple’s margins associated with each new Apple product are going to become smaller.
– When costs are rising faster than revenues, over time the two will cross and margins and earnings will compress. It has always happened, even to great companies like Nokia, MSFT, IBM, Sony, Dell, HPQ.
The firm does expect Apple’s product portfolio to continue to grow, albeit at a declining growth rate, and with significantly lower margins, due to competitive pricing pressures, rising material and operational, and marketing costs. For now, as we witnessed for Nokia in 1999 and 2,000, Apple Inc. (NASDAQ:AAPL)’s sales and product margins are still looking great for most analysts, however, the firm sees that being challenged over the next three – 4 quarters when gross margins are under real pressure.
Apple Inc. (NASDAQ:AAPL)’s hardware price premium and sales growth will decline over time, it is inevitable, and hence why its margins will decline. Apple’s net margins rose in the past 10 years from 1.% to currently 25%. Gross margins increased from 27.5 percent to 44 percent: Apple Inc. (NASDAQ:AAPL) is today making 16.5 cents more for every dollar of product sold today than it did ten years ago.
Compare this to Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) when its sales and margins reached their peak from 2000 to in 2003, Nokia did reach an all-time high margin of over 41%. This margin level for Nokia to a currently still acceptable 28%. As one can see, Nokia is far from dead, however, not even close to the industry leader and “infallible” innovation leader that it used to be just 10 years ago.
Now, today, Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) ’s global market share In cellular phone handsets is still much higher than Apple’s, and still with respectable margins, however, Nokia’s ADS share price has come down from over $50 in 2001 to around $4.00 a share. Only by Q1 2012, Samsung surpassed Nokia in global market share lead, and outsold Nokia by 93.5 million units versus Nokia’s 82.7 million units respectively.
Carl notes "subsequently, too late, as so often, way after an already -90% decline in the stock price of the incumbent downgraded company, Standard & Poor's has downgraded Nokia to 'junk' status at BB+/B with negative outlook due to high loss and still declined with growth of Lumia smartphones was not sufficient to offset a rapid decline in revenue from Symbian-based smartphones over the next few quarters."
The firm notes "in NO way are we saying or expecting for Apple Inc. (NASDAQ:AAPL) stock price performance for the next ten years to mirror Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s stock performance from the past ten years."
However, they see too many factors for investors and analysts to be impacting Apple Inc. (NASDAQ:AAPL) stock in the coming years, which will start to put Apple’s strategy in doubt, to put it’s product leadership and innovation in doubt, and which will give the competition of Apple Inc. more and more opportunities to re-take market share, and with stable margins. And all of these factors are going to have an impact on AAPL and it’s future price performance as a stock.
Carlo sees a lot more parallels between the next ten years for Apple Inc. (NASDAQ:AAPL) stock price risk to resemble a MSFT of the past ten years.