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The Case Against Apple

While I first started warning  about Android taking share from Apple in 2009, I was not worried about earnings at Apple. It wasn’t until this year that margin compression became an issue for me. But even then, it wasn’t clear the issue would knock Apple’s share price back. After the latest earnings release, I must change my tune. Estimates got ahead of reality and Apple missed this quarter. But the earnings report issued by Apple yesterday was just fine on top line and unit volume as it handily beat guidance due to the massive upgrade cycle now ongoing. Nonetheless, the report was very alarming on precisely the issues I have been warning about since the beginning of the year, margins, market share and earnings growth. In my view, Apple’s ability to leverage existing markets to propel growth in new markets in order to maintain earnings growth is now compromised. Therefore, I would rather see dividend increases at Apple to return cash to shareholders than a push into marginal markets where Apple has no competitive advantage. I still believe that Apple’s previous momentum will protect its share price somewhat over the short-term. However, given this is now the second consecutive earnings disappointment and it comes on the heels of a 12% stock price correction, it is now clear that Apple’s stock has peaked.

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In my view, Amazon is the real game changer in the competitive landscape here.  Amazon CEO Jeff Bezos has said it sells hardware at cost in order to recoup profits on services and Internet sales. I wrote last week that “my sense is that it will have the same impact on Apple’s margins that it has had in other markets, namely putting significant downward pressure on margins. For Amazon, it’s all about services and volume. That’s a low-margin business model. And now that Amazon is a mobile competitor, that’s trouble for Apple. I anticipate an Amazon phone, perhaps as soon as September 2013. By the time this happens, it will be clear that Amazon has been a threat to Apple’s profitability and share price will be down.” That is how I still see it, more so after the earnings announcement.


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.