Tim Beyers and I don't see eye to eye on Apple (Nasdaq: AAPL) as an investment at today's prices. He is bullish. I am bearish. It's the very nature of Dueling Fools. Now I get my shot to counter my worthy opponent's latest bullish claims.
Look away, Steve Jobs worshipers. I come with more mock than turtleneck.
Tim's bullish thesis consists of a few meaty morsels:
- The App Store is a powerful ecosystem in its infancy.
- Apple should be able to make more on its phones when its exclusive deal with AT&T (NYSE: T) runs out next year.
- With $28 billion in cash and marketable securities sitting on its balance sheet, it "allows Apple to focus on long-term innovation."
I've lined 'em up. Let's shoot 'em down.
App to succeed
The App Store is a hit, but just as Apple borrowed liberally from social networking outlets and Microsoft's (Nasdaq: MSFT) Xbox Live Marketplace in dreaming up the mobile concept, all of the other smartphone makers have caught on quickly.
Research In Motion (Nasdaq: RIMM) continues to widen its BlackBerry lead over Apple every passing quarter. It now has an applications platform. Google (Nasdaq: GOOG) has thrown out a wider net with Android, and it too will benefit from its app store.
Apple has served up a billion App Store downloads to iPhone users -- and iPod touch owners with Wi-Fi -- but what do you think that means financially to Apple? This isn't like Apple's iTunes Music Store, where most folks are paying for their digital downloads. The App Store's most popular programs are often the free ones, which users quickly discard. Still, even with iTunes, Apple has historically considered selling digital music to be a low-margin endeavor designed primarily to move iPods.
Apple's App Store may be a moneymaker as well as a promotional tool, but it will never rival the money Apple makes from AT&T subsidizing most of the iPhone purchase price.
Reach out and gouge someone
Tim believes that Apple will be able to command a king's ransom when it comes time to renew its deal with AT&T. Really? Isn't this the same AT&T that posted a dip in revenue, and an even larger decline in profitability, this past quarter?
More importantly, how big do you think the iPhone market actually is? Tim has an iPhone. I have an iPhone. However, it's not as if everyone can afford the $30-a-month unlimited 3G data plan that AT&T slaps on top of its regular wireless contracts. AT&T subsidizes roughly $375 for every activated iPhone, so it has to make that back somehow.
Tim sees AT&T paying more if it wants to retain its exclusivity, but the elasticity isn't there. If AT&T pays more, it will have to charge its subscribers even more, limiting the size of the iPhone market.
BlackBerry has been able to carve out a healthy subscriber base by positioning itself as an email-and-texting corporate gadget. Apple's offering is fun, cool, and resourceful, but it's a pain to peck out communiques on the iPhone.
Anyone who thinks that the iPhone can grow exponentially -- just as BlackBerry, Google, and hungry handset vets all push for growth -- is missing the ceiling. We've seen the mighty MacBook and Mac desktops peak; both had massive year-over-year sales dropoffs last quarter. Don't assume that iPhone growth will last forever.
This isn't a $13-a-month Sirius XM Radio (Nasdaq: SIRI) subscription, where it's the only game in town when it comes to satellite radio. We're talking about an aspirational device that is certainly not a cheap indulgence.
The $28 billion question
Finally, let's not assume that $28 billion makes Apple's think tank too big to fail. As rich as the Cupertino cradler is, it still birthed Apple TV, and missed last year's consumer shift to netbooks.
Companies like Microsoft and Cisco (Nasdaq: CSCO) also have tens of billions in the bank, but that hasn't been enough to bury the blunders that found both stocks closing in the high teens yesterday.
Apple's cash would be a valuation factor if the stock were trading close to the value of its liquid investments and cash, as it nearly has done several times in the last dozen years, but it's clearly trading at a market premium these days. Tim is right that Apple's history is one of hits, but it's also one of misses.
Coming off a quarter in which the only thing going in the right direction at Apple was the iPhone, I would hate to see investors overbidding for a company that seems to have become a one-trick pony when it comes to growth.
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