A Bear's case against Apple

2005 was spectacular for Apple (symbol:AAPL). The iPod just rocks. With the runaway success of the iPod, Apple stock has skyrocketed about 225% in 2005. I myself adore the iPod. I have gifted 4 iPods until now and plan to buy one for me soon.

But, how long will the iPod boom long? Anybody can guess it won't be forever. I feel that should happen in 2006 itself!

The way I see it is - the iPod is nothing but a sleekly designed pocket accessory for playing music. To me it is just amazing that nobody else could deliver a device which is at least equivalent if not better than the iPod. After all it is just a simple MP3 player. One day - and I feel not so distant in the future - the iPod will have a daunting competitor. And perhaps so much so that it may threaten to wipe it out altoghether. And I don't mean that somebody has to come out with a better iPod. It may as well be a different technology altogether. You know how LPs were replaced by audio tapes, which were replaced by CDs, which now are getting replaced by the mp3 players. I predict that unfortunately the iPod is probably going to meet the same fate. You can argue that the iPod is still in it's early stages of popularity. And maybe you are right. But I feel today technology is changing extremely fast and product lifecycles have shrunk significantly.

This is just one aspect of it. From a different perspective, the iPod (brand) will itself age. Today everybody wants to own it and gift it. But eventually people will get bored from it. Today it is the thing to buy. One day it will be anything but it. With a lot of iPods around, it will no longer have it's appeal however beautiful it looks. It will soon fall out of favor. Did you see what happened to Nokia phones? They were once the hottest cellphones around. But then they went out of favor and today Nokia has completely lost it's edge. Nokia phones are just like any other phones. That's what happens with everything however good it may be. Will Apple itself have the alternative for it's iPods? It's not unlikely, but I don't feel it's going to happen.

Plus Apple is currently demanding a lot of premium for the iPod. The iPod has a 100% premium w.r.t an equivalent (in terms of functionality) alternative today. No doubt that the iPods are unique and no other product can match them in terms of design and asthetics. But then people will not like to pay that premium forever. So Apple should see peaking of sales or reduced margins eventually. That will hurt profits.

Hey but Apple has a seemingly unending product line all set for the next year. What about iPod cellphones, video blogging, vast video content accessible on the video iPod, faster macs on intel chips?
Yes, some of these may help extend the iPod life span (in terms of product cycle). But they themselves do not look like blockbusters like the iPod itself. If you buy an iPod cellphone would you like to again buy an iPod? So that would be complementary. So the iPod cellphones will eat into the iPod growth. What do I care if a mac has a PowerPC chip or an Intel chip, so long as it works fine. So to me as a consumer that is irrelevent. The switch is a strategic decision for Apple and I don't think there will be a big positive impact for Apple. It may end up having a negative impact if the switch over does not happen smoothly - at least in the near term.

So how should you play Apple? For now I am an Apple bear. I may be wrong to determine, this soon, that the iPod mania is over. Apple is still a great company with great products and they may come out with other products and services that may propel their growth. But I am skeptical about that. I am betting against Apple. I feel it is a good short candidate (I have already shorted it). Please note that there is no imminent threat to Apple as of now. My analysis tells me that the technicals for the stock have been deteriorating (past 2 weeks). A lot of analysts have put a hold on the stock. And as I have mentioned above, my thesis says that there is no significant upside to the stock after this huge runup. If anything, there may be a downside. And I am betting on that. For me right now it just looks like a trade. I intend to cover-up my position if the stock drops to the low 60s.

Stay Tuned!