Reader Challenge: Articulate the Bear Case for Apple, Inc. Stock

As Apple (NASDAQ: AAPL  ) stock continues its rebound on a trajectory that looks headed toward its post-split adjusted all-time high of just over $100, the bear case for the most closely followed stock in the United States seems to be getting less negative coverage than in the past. On that note, maybe it's time for investors to check in on their assumptions baked into the stock's current valuation. Does Apple really deserve to trade just about $10 shy of its all-time high achieved in 2012? After all, were talking about a $550 billion market capitalization in a post-Steve Jobs era.

The challenge
As I attempted to make the doom-and-gloom case for Apple stock at $91.28, I kept running into walls. Maybe I'm biased. After all, I do own a number of Apple products, and the stock is my second largest holding.

On that note, I thought it might serve as a useful exercise to challenge readers. There is undoubtedly someone out there who is sure Apple stock is overvalued. If that's you, the market could use your opinion right now. It's always a good idea to consider both sides of any story. And considering the recent run-up in Apple's share price, there couldn't be a better time to hear out the bear case for the world's most valuable publicly traded company.

So if you refuse to buy Apple stock or (perhaps even better) have shorted the stock, please consider sharing your reasons in the comments below.

The bear case is difficult
I tried approaching the bear case from several angles. Here were some of the key areas that made my doom-and-gloom case for Apple stock difficult.

iPhones. Apple's smartphone segment makes up more than 50% of its revenue. If sales were to decline, it could be very bad for the stock. But Apple's alleged move to launch models this year with larger displays means the company will be adding models to a hot and proven market. With this in mind, I have trouble imagining that the important segment will suffer any time soon.

iPhone 5s. Image source: Apple.

Over the longer haul, Apple's consistently high retention, thanks to its "sticky" ecosystem of integrated hardware, software, and services, seems poised to bring customers back for new models.

Then there's the overall global smartphone market, which is still growing robustly. In 2014, IDC pegged the growth in unit sales at 38.4% over the year before. And there's plenty of room for further growth; in 2013, about 45% of the global population wasn't using smartphones yet. And, of course, smartphone sales will mostly come from upgrades -- not new customers. Fortunately for Apple, the average upgrade cycle among iPhone users is a very short two years.

Innovation. It's easy to say Apple can't innovate in the post Steve-Jobs era simply because the company lost the iconic CEO who transformed the company and launched a stream of revolutionary new products like the iMac, iPod, iPhone, and iPad. But Apple has fared particularly well since Jobs resigned. The stock is up 80% and revenue is up about 63%. 

Worries about Apple's lack of new products in new categories looks ready to come to an end. Apple CEO Tim Cook has promised to deliver on this front in the near future. And Apple seems confident in its overall lineup of upcoming products. Apple Internet software and services chief Eddy Cue said at the Code Conference last month that Apple has "the best product pipeline I've seen in my 25 years at Apple."

Valuation. It's rare that an industry-leading cash cow trades at a discount to the overall market. But that's the case for Apple, which currently trades at a price-to-earnings ratio of 15.3. Compare that with the S&P 500's P/E of 19. Does Apple really deserve such a conservative valuation, especially considering its aggressive share-repurchase program that will probably add meaningful leverage to the company's earnings-per-share growth, going forward?

AAPL PE Ratio (TTM) Chart

AAPL P/E Ratio (TTM) data by YCharts

Obviously, there are far more factors that will make or break Apple in the coming years. But these are three essential pillars for the company, and they all seem to suggest that Apple stock still looks like a great long-term holding.

What am I missing? Can anyone articulate the bear case for Apple stock? Thanks in advance for any thoughts.

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Comments from our Foolish Readers

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  • Report this Comment On June 15, 2014, at 12:57 PM, Chiam wrote:

    Colin Gillis has a mid 500 price target on Apple and a hold rating. He is the only analyst with sense. Sure Apple peaked. It went to 570.08 (81.44) last December. Then went below 500 for a short time.

    That is over $ 70 ($ 10) drop. Here is why Colin is right. A genius.

    1. Apple won't have anything for another 3-4 months. The iPhone 6 is being hype to being a bigger phone. I doubt they come out with anything but a 4 inch phone but even if they did it would cannibalize tablet sales which are basically dying right now. iPad sales are imploding and Samsung hew new thinner nicer tablets coming out which should destroy the iPad.

    2. The Galaxy s5 is killing it. So many people are leaving IOS and going to Android.

    3. The 5.5 inch iPhone would come next October which is so long away.

    4. There is not watch coming. it is still an idea that Apple is interested in but they are not working on any watch.

    5. Tim Cook is no Steve Jobs.

    6. So far only buy backs and dividends are moving the stock up.

    7. It is way overbought.

    8. Bad deal on Beats could wreck Apple. They spend alot of Money which will hurt the company.

    9. Running out of Domestic Cash. had to borrow for dividends adding alot of debt now.

    I could go on all day and night. Expect Apple stock to fall about $10-15 dollars and drop below $ 80. $ 79 is my guess Apple will be dropping for days on end as a reversion the mean takes place.

    Shorting Apple is brilliant. Michael Blair expects the stock to go below $ 300. David Trainer $ 250. They are the best of the best when it comes to analysts.

    Down Monday $ 3-5 as the sell off in Apple continues. At $ 69-79 i would be nibbling and if it drops again to $ 55 (385) I would back up the truck.

  • Report this Comment On June 15, 2014, at 2:11 PM, WineHouse wrote:

    Chism quotes Colin Gillis as saying (writing) that "The Galaxy s5 is killing it [it = iPhone? Apple? "it" is not clear]. So many people are leaving IOS and going to Android."

    I question the validity of these statements. I see lots of advertisements for the Galaxy S5, especially from carrers (ATT, Verizon, etc.), and I've even seen ads for "buy one, get one free!" This makes me wonder just how well the device is actually selling. I have not seen any actual unit sales, revenue or profit numbers for any Samsung phones (just numbers of pre-sale inventory deliveries to the carriers). I also haven't seen any actual financial numbers for Samsung (which also is in a lot of other businesses, even way beyond the TV's and refrigerators that are well-known). Samsung lacks corporate transparency, since it is not subject to SEC reporting rules (it's not traded on any US exchange). I wonder why Samsung finds it so necessary to engage in such overwhelming marketing. Apple products almost sell themselves.

    I also question whether iPhone users are really abandoning iPhones in droves and moving over to Android-based products. Just sitting on the New York City subway trains at various hours of the day tells a very different story. During daytime hours, the vast majority of people sitting on the trains using cell phones are using iPhones; some of those using non-iPhones are using the large-format "phablets.". Later in the evening, it's still more iPhones than non-iPhones but the ratio is more like 65:45. However, the non-iPhones are primarily small handsets, suggesting that they are not the "premium" Android phones. My interpretation is that people who absolutely can't afford an iPhone (or, more likely, who can't afford to use a carrier that offers iPhones) are the ones using alternative phones; but if they can afford it at all, they go with the iPhone. AND it's not just the women.

    So I'd like to see some real evidence (other than bloggers whose English is clear of 2nd-language quality) of this "great rotation" from iPhone to Android.

    Until I see convincing data from reliable sources, I will remain skeptical.

  • Report this Comment On June 15, 2014, at 2:57 PM, imvho wrote:

    Since Colin Gillis "is the only analyst with sense", let's take a look at his logic.

    Based on the following article:

    http://www.techinsider.net/apple-inc-aapl-not-worth-chasing-...

    Gillis said "Apple stock is not worth chasing at the moment" because the second quarter numbers the market liked "were actually not that good".

    His reasoning:

    1. "He said that though the iPhone numbers were good for that quarter, the iPad numbers were 'miserable' with a decline of 16%.

    2. "at 17% unit growth, the iPhone grew slower than what the market is currently doing."

    3. "The first quarter was the China Mobile quarter hence the expected boost to Apple numbers."

    Analysis of his reasoning:

    1. Incorrect. iPad numbers only fell 3% as those who listened to the entire quarterly report know:

    "Last year, we sold over 19.4 million iPads into our channels and sold through 18 million, and therefore increased channel inventory by 1.4 million units. As a result, the year-over-year sell through decline was only 3% compared to the sell-in decline of 16%."

    http://www.tuaw.com/2014/05/01/some-needed-context-surroundi...

    2. Misunderstood. At 17% iPhone sales growth, Apple sold 43.7M iPhones, the largest ever for Q2, beating its own and all analyst estimates. This is a tremendous victory.

    But marketshare is meaningless; Follow the money: Apple is after profitshare.

    By February Apple was collecting 87.4% of smartphone profits:

    http://www.businessinsider.com/apple-smartphone-profit-share...

    3. Misleading. It is true that Q2FY2014 is the first quarter that China Mobile (CHL) was selling iPhones, but the implication that this was a one-time surge based up on pent-up demand is not at all true. True, CHL sold 1.2M preorders of iPhones before the doors opened on day 1, and they are continuing to sell briskly into their 785M customer base, but the real story is their unprecedented huge 4G rollout.

    Earlier this month, CHL reported it had sold over 12M phones to new 4G users and they are on track to sell 100M phones to new 4G users by the end of the year.

    Since "most of them are iPhones", this is more than a wave.

    It's a tsunami!

  • Report this Comment On June 15, 2014, at 3:09 PM, deasystems wrote:

    @Chiam:

    Chiam not but you are…

    1. If you keep crying "wolf!" people will stop believing you. I think many have done so already.

    2. The Galaxy S5 is an acknowledged dud

    3. Next October is a mere 4 months away

    4. You may be correct. So what?

    5. Tim Cook is better than Steve Jobs—look at the stock price

    6. Yes, buy backs, dividends, correction of the correction, quarterly results, and prospects. Other than those things, nothing is moving the stock up. Sheesh…

    7. (This is my favorite.) If the stock is "overbought," it must necessarily be "oversold" as well. Those shares are not supplied out of thin air, Chaim…

    8. Apple spent pocket change on Beats.

    9. Domestic cash gets replenished at an astounding rate. You should be so lucky.

    I could go on and on. Those that short AAPL are in for a world of hurt.

  • Report this Comment On June 15, 2014, at 3:25 PM, fneww1212 wrote:

    The bear case for the stock is IMO quite simple, but unlikely.

    Since the last earning report the stock has been on a tear and there is great optimism about the forthcoming iphone 6 and the capabilities, particularly health related, of the upcoming iwatch.

    The stock market can be very fickle and although the iphone 6 in 4.7 and 5.5 inches are unlikely to disappoint, the iwatch as a new category will have to prove itself and sell in much greater numbers than the smart watches that are currently on the market to quiet Apple critics who assert that without Steve Jobs Apple has lost its innovative mojo.

    So if the first gen iwatch is not a smash hit, the critics will attack the iphone 6 as a me too catch up as evidence that Apple is not a leader anymore.

    This type of attack could cause a change in investor psychology and lead to a selloff in the stock.

    I personally am very long the stock as I believe that the leaks about these upcoming products provide clues to the assessment that the odds are that these products will be acclaimed critically and will sell lot hotcakes.

  • Report this Comment On June 16, 2014, at 9:50 PM, RoyalRoyal wrote:

    I love the approach of this article, thank you.

    I'm most worried about upcoming earnings. Even though recent inventory checks seem bullish for the quarter, common sense tells me that people really may be waiting for the iPhone 6 (I am)... that's gotta hurt on some level.

    On a macro level, I'm worried about a war breaking out... or oil spiking to $140... or some such... which, of course, would spook the entire market.

    I also worry that AAPL could shoot itself in the foot and make a dud product... Newton, anyone? Specifically Apple could underpower the iPhone 6 relative to Android devices... they seem to do that... and at some point that will catch up with them. I also think Apple made a user interface mistake taking away the "button" controls in iOS7... used to be easy to know what to tap... now it's a bit more guesswork... the point is that Apple isn't infallible and we may see things get more complex, not less... which could hurt adoption.

    Finally, I worry about contrarian things... everybody really is jumping on the bandwagon... you know it's bad when even an author has to resort to a bear challenge!

    With all of that said, I can easily see -- actually do see -- the counters to all of these.

    Fewer iPhone 5's sold could just as easily mean even more iPhone 6's will be sold. In that contrarian way, a net positive.

    When war breaks out, that reduces uncertainty... and generally speaking people look for a "flight to quality." Another net positive. (Though, if oil misbehaves, that's an entirely different story... that's one to watch for the entire market.)

    And Apple has already shown people a lot of iOS 8... and we know from the history of Apple laptops, Apple will figure out that smokin' fast hardware will count in mobile, too.

    More to the point: AAPL has been in the penalty box for so long that the stock really has been depressed... if you normalize the terrific gains over the last year with the disappointing performance over the last few years, the chart kind of suggests Apple ends up where it should be... with the trajectory still aiming high and to the right. Given I'm a big believer in the pendulum swinging too far in any direction, I don't think we're at "enough" yet... because even a mediocre iPhone 6 upgrade cycle will be staggering... and if you throw on an iWatch (personal health/info development platform), iTV (entertainment development platform), and maybe a massively-connected payment system and such...

    ... it's just hard to see -- given that Apple is one of the top brands and cash machines in the entire world -- AAPL *crawling* into simple p/e parity with the rest of S&P as being crazy.

    Just p/e parity alone represents about a 24% increase in stock price... or up to just under $115 a share. For a company that arguably is the most relevant in its growing space... and about to really, truly enter new spaces... does $115 feel so far from where we are? Not really.

    Imagine what AAPL can be worth if actually gets a multiple it deserves... ?

    Arg, I'm not sure I was very helpful to the bear case, sorry!

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