Throughout the years, I've countered many Apple (AAPL 0.17%) bears, poking holes in their bearish theses. That includes Ed Zabitsky of ACI Research (Part 1 and Part 2), Paul Schatz of Heritage Capital, and David Trainer of New Constructs, among others. Of course, sometimes, the bears can be right, like Jeff Gundlach of Doubleline Capital -- even if Gundlach is now in the Apple bull camp.
What bear should we poke at next? Adnaan Ahmad of Berenberg Bank, come on down!
Is Apple worth just $60 per share?
Apple's latest earnings release has received a mostly warm reception from investors and Street analysts. Not Ahmad, though, as he has long maintained a "sell" rating on Apple shares alongside a $60 price target, a rating he reiterated the day after the report.
Ahmad acknowledges that the iPhone 6 is a compelling upgrade and a strong product, but perhaps too compelling and too strong. So much so, that the effect may be to pull demand forward, and that future iPhone models will lack a meaningful selling feature. As a result, Ahmad expects 2015 to be a good year for Apple -- but then, he thinks the company risks substantial deceleration in 2016. For what it's worth, he's also bearish on Samsung.
Stop me if you've heard this one before
If the whole Apple-is-doomed-but-wait-a-year thesis sounds familiar, it's because Ahmad has said exactly the same thing before. Almost exactly two years ago in October 2012, Ahmad said, "As we have stated before on many occasions, Apple's time to turn from a tech titan into a dinosaur will come, but we still think that we are at least a year away."
At the time, Ahmad's pessimism was predicated on the notion that Apple's premium pricing strategy was unsustainable, and Apple would be forced to cut prices in the face of escalating competition, or simply lose market share. The resulting margin pressures would be painful for the company and its shareholders, according to Ahmad.
Ironically, Ahmad actually had a "buy" rating on Apple (and Samsung) at the time, but believed the writing was on the wall for the iPhone business.
Sell Apple... but Apple should buy Tesla?
Five months later, Ahmad downgraded both Apple and Samsung to "sell," saying competition in the smartphone market would kill ASPs and margins for both companies. He figured gross margin would fall to the 30% level, and could potentially even decline to the 20% level like other consumer electronics manufacturers.
Ahmad makes numerous comparisons to other handset vendors that have suffered this fate in the past, including Motorola, Nokia, and LG, to name a few. Ahmad thought shares were heading to $360 (approximately $51.43 split-adjusted).
Later that year, Ahmad would also write an open letter to Tim Cook and Apple's board, suggesting that Apple should buy Tesla, and enter the auto market with an iCar.
Back to the future
That brings us back to the present, and Ahmad's forecast of Apple's future. Ahmad's predictions about gross margin have not played out. It's true that gross margin was under pressure in 2012 -- but mostly because they had reached unsustainably high levels. It was good while it lasted, but some contraction was always inevitable.
Margins have now stabilized around the 38% level, and Apple has some margin tailwinds going forward, including a higher-priced iPhone 6 Plus, and commodity prices remain favorable. In fact, the biggest margin headwind that Apple faces in the current quarter is foreign exchange rates as the U.S. dollar continues to strengthen against most other currencies. Apple's hedges can only mitigate this risk to a certain extent.
More importantly, Apple's pricing power remains intact. The company does not want to suddenly adjust prices in foreign markets based solely on fluctuating exchange rates (known as price harmonization). Foreign exchange headwinds are temporary, and don't play a part in Ahmad's bearish thesis.
Put another way, Ahmad's $60 price target implies a $352 billion market cap. Backing out Apple's $130 billion in net cash would then translate into an enterprise value of $226 billion. That would be less than the enterprise value of rivals like Google, even as Apple's implied net income guidance for the current quarter ($14.4 billion) is more than Google makes in a year ($13 billion).
Wait for it
At the heart of it, Ahmad's basic premise is that Apple's profitability is unsustainable, and that it will succumb to historical trends of mean reversion. That's similar to David Trainer's thesis (linked above), except Trainer was looking at net operating profit after tax, or NOPAT, instead of gross margin.
You'd think that, by now, it should be obvious that Apple has unrivaled pricing power, which allows it to maintain margins better than any other consumer electronics company on Earth, subject to natural fluctuations. Apple is far from the average company, so mean reversion is less applicable to the Mac maker. More broadly speaking, comparing Apple to hardware-only OEMs is misplaced, because Apple's unique pricing power comes precisely from its integrated hardware/software strategy in the first place.
So far, Ahmad's calls -- or Zabitsky's, or Trainer's, or Schatz's -- haven't come to fruition. Maybe next year.
