According to 24/7 Wall St., Apple (AAPL +2.59%) is now the third-highest shorted stock in the Nasdaq. To be clear, this refers to the absolute number of shares sold short rather than the percentage of the float sold short. Still, it's interesting to see that between the Aug. 29 and Sept. 15 settlement dates, the number of Apple shares sold short jumped from just over 96 million to over 138 million.
This begs the question: Is it time to short Apple?
What would a potential short thesis look like?
Though I am not short Apple, I could see bears making the following arguments:
- Apple will benefit from a very large upgrade cycle thanks to the recent launches of the larger iPhone 6 and iPhone 6 Plus (CEO Tim Cook reportedly referred to it as the "mother of all upgrades").
- However, this upgrade cycle (which services pent-up demand for larger iPhones, according to industry analyst Pat Moorhead) might create a difficult comparison for next year's iPhone 6s and iPhone 6s Plus, which could suggest Apple has "peaked." (This appears to be a common concern.)
- Additionally, the latest iPhones are reportedly more expensive to build than their predecessors (per Credit Suisse via BGR), which could lead to margin compression if Apple can't shift the mix up to the 64GB and 128GB storage options (see my more detailed analysis here).
I think that the short thesis that I previously believed, which essentially stipulates that Apple will see substantial margin erosion at the hands of the likes of Samsung and Xiaomi, probably doesn't hold a lot of water.
The demand seen for these latest iPhones, especially the more expensive iPhone 6 Plus, shows that Apple iPhone customers are fairly insensitive to price as long as there is enough value being delivered.
Nevertheless, that leaves the question of whether the "new" short thesis outlined above holds water.
I'm not so sure
The problem that I have with the first major pro-short argument is it fundamentally hinges on Apple failing to deliver new and improved devices.
When Apple launched the iPhone 5s, the phone largely looked like the older iPhone 5. However, Apple included Touch ID and a substantially faster processor, and brought to bear iOS 7, which ran best on the latest hardware (it's amazing how slow older iPhones are now; they seemed so fast at the time). I expect that with the iPhone 6s, Apple will bring a much larger performance increase than what we saw with the iPhone 6/6 Plus.
I also wouldn't underestimate how much effort Apple will put into revamping the camera system of the next iPhone. Tthere's still a long way to go before these smartphones feature professional-quality cameras.
I could rattle off more potential improvements, but the point is that no matter how good the new iPhones are, the next versions can always be better, and I think that Apple is very good at offering a compelling value proposition with each of its releases.
The margin question
The other big argument is that the new iPhones will probably have an unfavorable cost structure relative to prior models of the handset. This is true; the new iPhones have more chips and more features, and probably a chassis that is more expensive to build. I wouldn't be surprised to see Apple experience a gross margin drop relative to what it saw with the iPhone 5s.
Nevertheless, the nice thing here is that Apple will likely more than offset this with the value proposition it is offering via the new storage tiers. It's also very likely that Apple will sell a lot more iPhones now that it has a particularly high-quality lineup of devices: a premium 4-inch device (iPhone 5s), a premium 4.7-inch device (iPhone 6), and of course a premium "phablet" (iPhone 6 Plus).
Foolish takeaway
I'm staying bullish on Apple's long-term prospects. No company comes without risk, and things could certainly go wrong and drive down the value of the stock. But I think the business still has plenty of room to grow as it enhances its core product lines. And, hey, that Apple Watch might do well, too, though I personally wouldn't bet big bucks on that.
