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Why This Apple Bear Was Dead Wrong

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Having a cheery consensus can certainly be an expensive proposition. That comes directly from the Oracle of Omaha himself, which goes hand in hand with another famous Buffett-ism (which are much wiser than Bush-isms): "Be fearful when others are greedy."

The Street is uncharacteristically uniform in its bullishness when it comes to Apple (Nasdaq: AAPL  ) , but there is one lone wolf standing apart from the pack with a big fat sell rating on the Mac maker's shares. We Fools aren't unanimous either, as we have Apple skeptics among our ranks.

Who is this solitary Street bear … and is he right?

The one and only
His name is Edward Zabitsky, principal and CEO of ACI Research. Zabitsky's bearish opinion on Apple is nothing new, but has garnered attention ever since he initiated coverage on shares with a sell rating back in 2009. Let's take a stroll down memory lane to see how Zabitsky's tune and bearish thesis has evolved and whether or not it holds up, or if it was ever any good.

It's April, just after the market bottoms at the height of the financial crisis. Apple trades in the ballpark of $122, and Zabitsky warns:

When the iPhone came out, it was so far beyond what was out there on the market, pretty much up until now. But with what's coming out from competitors, that advantage is going away. For the first time, Apple's going to be faced with a serious growth challenge.

Fast forward to December, when shares are near $209, and he lists three distinct reasons to sell Apple:

  1. The iPhone is a data hog and sucks down bandwidth, and isn't profitable for wireless carriers.
  2. Rivals are entering the mobile browser space to aggressively compete.
  3. Despite Apple's trendiness, its hardware will eventually become irrelevant.

Zabitsky was certainly right on a number of those assertions. Competition has absolutely heated up as Google (Nasdaq: GOOG  ) Android and iOS have duked it out for mobile dominance, but that hasn't stopped Apple from racking up huge iPhone sales.

Wireless carriers really do hate to love Apple, since the iPhone is a data hog and Apple extracts larger subsidies from them than do other handset makers. Sprint Nextel (NYSE: S  ) wanted to join the party so badly that it's committing $15.5 billion minimum in iPhone purchases over the next four years. But crimping carrier profitability sure hasn't stopped them all from wanting in on the iAction.

Zabitsky's prediction of hardware irrelevance hasn't panned out, either. Even the latest iPhone 4S had relatively incremental hardware improvements compared to its predecessor, yet Apple proceeded to sell 4 million units on launch weekend alone.

In May, Apple is trading near $236, while Zabitsky goes as far as to recommend selling short with a price target of $126 -- roughly where shares were a year before, at the time of his first call. This time, he takes more of a macro approach coupled with the same escalating competition argument and belief that AT&T's loss of exclusivity would put downward pressure on prices:

Apple is a luxury brand and in the past has correlated very well with LVMH, Moet, Hennessy, and Christian Dior. America didn't get rid of the bad debt -- the government just took it over and consumer credit is trending down. When the iPhone came out it was grossly different. Apple has raised the bar on what's normal, but other phones are easily narrowing the difference because web technology is easier to program.

It now appears that the US was able to avoid the boogeyman affectionately known as a double-dip recession, while iPhone average selling prices are higher now than they were then ($659 vs. $635).

Wrong while being right
Zabitsky's historical bearish thesis was mostly predicated on intensifying competition assailing Apple's moat, hardware commoditization ruining the premium pricing that Apple's luxury brand fetches, and tensions with wireless carriers.

He actually has been correct with some of those predictions. The mobile sector, including both hardware and software, is one of the most highly competitive industries on Earth, thanks to its astronomical growth. Wireless carriers undoubtedly resent Cupertino for sucking out their margins, but they have little choice but to play ball because the iPhone is what consumers demand.

But even when he's been right about these two aspects of the overall landscape, neither has remotely translated into deterioration of Apple's business. If anything, Apple is stronger now than it was three years ago thanks to its competition -- Research In Motion's (Nasdaq: RIMM  ) market share keeps shrinking and Hewlett-Packard's (NYSE: HPQ  ) webOS is now free.

So far, Zabitsky has been dead wrong. He's expressed his bearishness at prices of $122, $209, and $236, all of which would have been multibagger winners on the long side. If he had been making CAPScalls relative to the broader market, each pick would be rocking respective scores of (285), (139), and (108), respectively, through last Friday. How's that for Moneyballing the Financial World?

His thesis has changed a bit in more recent years: Check out the follow-up to this article by clicking here.

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Fool contributor Evan Niu owns shares of Apple and AT&T, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2012, at 11:23 PM, accelerando wrote:

    Of course one remembers any number of articles on this very site explaining why apple was at the end of its growth. I remember one fool who claimed that apple couldn't ever get to a market cap of $200 million -- I mean companies that size -- like ibm and walmart and ge and microsoft -- I mean those are real companies and what is apple -- yes -- those words were written right here -- along with thousands of other bearish words on apple from when it sold for $10 a share all the way to around six months ago when the fool jumped on the bandwagon.

  • Report this Comment On March 06, 2012, at 11:35 PM, jdwelch62 wrote:

    You had me going, Evan, it was a great article, but then it just... died. I clicked on your "follow" link, but it's a dead link. Is there more to this story past May of 2010 (which is kind of a long way ago, in a relevant sorta way, y'know?)... If the moral of the story was, "Double check Eddie Z's analyses", I get it, but where we're you really going with this piece?... Good research, but... Sorry, I don't get the ending...

  • Report this Comment On March 06, 2012, at 11:42 PM, TMFNewCow wrote:

    jdwelch, Part 2 is on a timer and should be up in about 20 minutes. Sorry for the confusion and check back momentarily!

    Foolish best,

    -- Evan

  • Report this Comment On March 06, 2012, at 11:45 PM, seanhoade wrote:

    To jdwelch62: The other half of the article will go live at midnight ET. Sorry for the inconvenience.

  • Report this Comment On March 07, 2012, at 1:19 AM, jdwelch62 wrote:

    Ah! Found it. More rambling comments over there... Until next time... :-)

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