May 9, 2016

Apple and Berkshire still a short

Apple chief Tim Cook appeared on Mad Money last night for a lengthy interview with Jim Cramer, but his interview did nothing to dissuade me from my fundamental short thesis for the stock.

Shares have fallen for the past eight sessions, stockholders are justifiably concerned and AAPL remains one of my favorite shorts on my "Best Ideas" list. It seems like I've for some time been a lone wolf in adopting an ursine view of Apple's sales-and-profit outlook. In fact, I've been consistently criticized and attacked for holding a negative view of the world's most beloved company. (For example, a Fortune magazine writer last year leveled an ad hominem attack on me, although the publication quickly rescinded his most serious accusations.)

I noted in yesterday's opening missive that Warren Buffett and Charlie Munger of Berkshire Hathaway, responded well to questions put to them at this weekend's shareholders' meeting, but that the queries were weak and nonrevelatory.

By contrast, Jim Cramer asked hard-hitting questions last night that Apple's CEO mostly whiffed at by delivering rather vague, glittering generalities and standard responses. Of course, good investing stories don't need to be sold -- not by Cook, and not by Carl Icahn or any other current or former large Apple investor. And while iconic stocks die hard, paradigm-shifting business people like late Apple CEO Steve Jobs are next to impossible to replace. We all remember Jobs, and one of last night's messages to me was that Cook is no Jobs.

The current Apple CEO emphasized a long-term, bright outlook for Apple -- but frankly, I've never heard a top manager not say that his or her company's intermediate or long-term outlook looked bright. But the business landscape constantly changes in the interim as new competitors line up and the threat of commoditization surfaces.

Apple faces some unique threats, like the Chinese government's business attitude and uncertain regulatory atmosphere. That was Icahn's alleged reason for selling his large AAPL stake, but Cook glossed over such threats.

The CEO did admit that the company's near-term outlook is deeply dependent on one product, the iPhone 7 series. But nothing I heard changed my view that Apple's product-upgrade cycle will now elongate after the unprecedented success of the iPhone 6. That was likely Apple's last important product upgrade, and the company seems unlikely to ever repeat that success.

Cook's answers to Cramer's questions also often fell flat in substance. For example, he replied to questions by saying things like: "I think that in a few years, we will look back and people will say: 'How could I ever have thought about not wearing this [Apple] Watch?' ... People love our products."

As to new-product opportunities, Cook seemed to subscribe to the notion that if Apple builds it, customers will come -- even though the high-end smart-phone market has become mature.

The CEO also said investors shouldn't just look through the lens of the United States, and that the overall market doesn't have to grow for Apple to succeed. Instead, he said investors should be more attentive to "switchers" from Android phones.

Frankly, I remain unconvinced. I see Apple's competition as mounting in intensity -- and representing a threat to sales, pricing, profits and margins. Stated simply, I don't see any present innovation or prospective creativity at Apple that will bring Cook's statements to reality for either the iPhone or the Apple Watch.

The Bottom Line

After the interview, Jim Cramer wrote in his column:

"I have been a big believer that there cannot be a bottom until we get some analyst capitulation. We get that, then we get give-ups, we get give-ups and we don't go to Gilead-like levels. Without give-ups, though, I think you get more of what we have had even after the Icahn interview because without more buys-to-holds there's no upgrade firepower. I have seen this movie before. We need abandonment and spurned love before we really get to terra firma. I don't see it yet, but I sense we soon will."

I agree. Apple's shares have not yet met terra firma, and with last year's record earnings not likely to be eclipsed for years, the stock's outlook looks poor to me from both a relative and absolute standpoint.

Indeed, Facebook and Amazon are already challenging Apple's position as the world's most popular company. For many like myself, Apple is already a distant third.

Position: Short AAPL and BRK.B