Tuesday, 15 November 2011 10:44

Where Are The Pundits And Armchair Analysts When It Becomes Apparent That Apples Is Indeed Susceptible To Google's Android Onslaught? Featured

Reviewing my bearishness on Apple pending an earnings miss (which was right on point) and my bullishness on Google due to successful diversification of business lines deeply into mobile and cloud computing brings us to the realization that there is much more of the same to come.

Apple's share have been coming under pressure lately (in addition to the dip taken after the earnings miss I predicted last month), primarily due to rumors of potentially disappointing iPhone 4S sales.

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The rumors spring from reports that Apple has canceled orders from serveral suppliers due to problems sourcing parts. These rumors have been countered by reports of long lines at Apple's retail stores and apparent strong demand. What many seem to miss is that supply issues, demand shortage or any combination of the two still result in the same thing - lost sales. Although a crimp of sales stemming from an inability to meet strong demand may sound like a good thing, it is a very bad thing for Apple at this juncture. This is the reason why...

Apple has been lauded for selling up to 4 million iPhone 4Ss in the first week of its release. This includes the pent up demand stemming from those waiting for the new release. While this number seems significant, it still does not match the run rate of Android phone sales, which are still growing at an amazing clip - up to 650k per day - extrapolating from the previously reported growth rates. That means that even with pent up demand being met, iOS flagship phones are still trailing Android "activations". Add to this the liklihood of sales being pushed into the future due to supply issues and you have what is tantamount to significant lost sales. Why?

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Our Uber Growth Thesis For Google Is Intact and Performing Well

 

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Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and in substantially more detail in private -the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).


Because Android hardware and software has now surpassed iOS (yes, even the most recent iOS5 and 5.1 series upgrades, which have been nriddled with bugs due to Android's pushing the release schedule for the entire industry to the hilt). If one were to obectively compare the Samsung Galaxy SII, the Samsung Galaxy Note, the HTC Rezound, the Google Nexus Prime (running the next generation Android OS), or the Motorola RAZR II, you will see these devices trounce the just release iOS products in nearly every category - from HD screens, to speed, to capability and flexibility and cloud accoutrements. The Samsung Galaxy SII is 9 months old and Apple still couldn't (or more accurately wouldn't) produce a comparable product. I believe this was a very strategic error on Apple's part, born of management hubris. The iPhone 5 should have been released and Apple should have given it everything they had. Because they didn't, the functionality difference is simply growing too wide, a gap that Apple will probably not be able to close when they do release their revolutionary upgrade.

In the post called The Perilous Game of Patent Pain That Apple Plays May Very Well Cause It Some Long Term Share I illustrated the extreme (yet absolutely mandatory - its not as if they have a choice in the matter) risks that Apple is imbibing in challenging its most strategic vendors in a global game of litigious cat and mouse. After all, Apple is essentially a cell phone company as defined by any reasonable metric - earnings, revenues, units shipped, etc. Samsung, athough currently the number one smartphone manufacturer in the world (after just capturing the title from Apple who held it briefly after taking it from long standing champ Nokia), is still not (essentially) a smart phone company. The same can be said for the other major vendor cum competitor, LG Electronics. Losing this market does not absolutely invalidate the companies' earnings, as it would with Apple.

The graph below illustrates the importance the iPhone represents to Apple's franchise. Believe it or not, this graph actually understates the importance of the iPhone to Apple for while it brings in 45% of the revenues, it is responsible for about 70% of the profits. Apple has become too reliant on one product, although that reliance was borne from the fabulous success of said product. While Apple will probably derive some much needed revenue diversification from iPad sales, the iPad will face the same hurdles that the iPhone is coming up against - and that is competition from Android-based devices and potentially even Windows Mobile 7 8 (albeit this is an admittedly much more speculative statement).

Breaking the argument down even further, you see how the iPod and the iPhone have literally transformed this company. While I am sure it will continue to be fantastic company with cool products, I doubt very seriously that it will be able to grow in the future as it has in during the last 7 years.

The saving grace is that the smart phone and portable computing market will grow quite quickly, allowing companies with dwindling market share to still capture increasing revenues. The ugly reality is that those revenues will have to be burdened with increasing R&D, marketing and distribution costs since the amount of competition will probably scale faster than the market itself. That, my friends, is a very good

My apparently highly contrarian call was literally the antithesis of what the street forecast - the EXACT OPPOSITE! Reference The Only, and I Mean the Only, Investment/Research House To Warn Of An Apple Miss Is Vindicated!!!

... pundits in private equity who I would have normally assumed should have know better jump on the Apple wagon, as excerpted from My Thoughts on Roger McNamee's View of Google and Mobile Computing...e

Of note, pundit recommended long Apple and short Google for guaranteed profits. Google blew out numbers this quarter (Our Uber Growth Thesis For Google Is Intact and Performing Well) and Apple missed, all the while Google is strategically positioned to do much, much more damage. 

I'd like to put this pundit's/investor's advice in perspective...

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You would handily had your ass handed to you being short Google and long Apple since last quarter's earnings announcement as Google spiked and Apple dropped, which is the first quarter that I recommended to look for concrete signs of Android fatigue and margin compression and a continuation of my ongoing Google reco. This process and trade is one to play out over time. It will not happen overnight and will culminate in the near term, but Apple is being severely trounced in the mobile computing wars by Google and the media and sell side are apparently ignoring this fact.

As for the comment about nobody makes money from Android, well those entities that make money from Android disagree. I have outlined this in the first quarter, reference Apple Gears Up To Combat The Margin Compression That Apparently Only It, Google & Reggie Middleton Sees Coming Monday, February 14th, 2011.

On this point, I must give props to Herb Greenberg for allowing me to espouse my contrarian, yet highly accurate mantra concerning Apple as well as US banks' derivative exposure through the mainstream, namely CNBC. The derivate issues have recently reported by Bloomberg and ZeroHedge, reinforcing my many warnings, ex. So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?

Of course, as timing would have it, I predicted that Apple would miss 4 to 6 quarters after the pronouncement I made on international TV exactly 1 year ago via CNBC on the eve of Apple's earnings (3:40 into the video). Exactly 4 quarters later.... Hmmm!

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Simple math, simple business logic, simply common sense, yet the Apple hordes attacked relentlessly. Listen, what Google has created to compete with Apple, RIM, MSFT and Nokia, was not a new technology - but a new way of doing business. Less than free was their new business model and it proved to be pretty damn effective.

Margin compression follows a slip in sales due to competition. You see, in order for Apple to maintain its unit growth, it wiill have invest more into the product, cut costs, or both. Any scenario leads to margin compression. Since I have written so much on this topic, I will not rehash, but simply point to the prophetic post I made two weeks ago in calling for what I considered to be the obvious: Sliced Apple Margins For Dinner?

 

Archived 2010 posts on the Creatively Destructive Pace of Technology Innovation and the Paradigm Shift known as the Mobile Computing Wars!

  1. There Is Another Paradigm Shift Coming in Technology and Media: Apple, Microsoft and Google Know its Winner Takes All
  2. The Mobile Computing and Content Wars: Part 2, the Google Response to the Paradigm Shift
  3. An Introduction to How Apple Apple Will Compete With the Google/Android Onslaught
  4. This article should drive the point home: 
  5. A First in the Mainstream Media: Apple’s Flagship Product Loses In a Comparison Review to HTC’s Google-Powered Phone
  6. After Getting a Glimpse of the New Windows Phone 7 Functionality, RIMM is Looking More Like a Short Play
  7. RIM Smart Phone Market Share, RIP?
  8. Android is gaining preference as the long-term choice of application developers
  9. A Glimpse of the BoomBustBlog Internal Discussion Concerning the Fate of Apple
  10. Math and the Pace of Smart Phone Innovation May Take a Byte Out of Apple’s (Short-lived?) Dominance
  11. Apple on the Margin
  12. RIM Smart Phone Market Share, RIP?
  13. Motorola, the Company That INVENTED the Cellphone is Trying to Uninvent the iPad With Android
  14. Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space
  15. More of the Android Onslaught: Increasing Handset Revenues and Growth
  16. The BoomBustBlog Multivariate Research in Motion Valuation Model: Ready for Download
  17. The Complete, 63 pg Google Forensic Valuation is Available for Download
  18. iSuppli Continues to Validate BoomBustBlog’s Original Thesis: Android as the Viral Game Changer!
  19. BoomBustBlog Research Hits Another One Out the Park! Google up nearly 10% after hours, true blowout earnings unlike JPM
  20. As I Warned in June, DO NOT DISCOUNT Microsoft in This Mobile Computing War! Their Marketing Campaign is PURE GENIUS! and it Appears as if the Phone Ain’t Bad Either
  21. Reggie Middleton Wasn’t the ONLY Openly Apple Bear in the Blogoshpere, Was He?


 

 

Last modified on Tuesday, 15 November 2011 16:58

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