Apple: The End Is near

Apple (AAPL) had their Q2 2013 earnings conference call last night. The after-hours pop and drop was a mix of investor denial drowned by a flood of savvy investors taking profits. But it’s also a clear indicator that the inflection point I’ve been talking about in previous articles has happened.

My thesis has been that Apple is changing into a different type of company. What happened last night is strong evidence that I’m right. And I’m sorry about that. I’ve been an Apple user, developer, and investor for nearly three decades. From the day the first Mac launched in 1984 I’ve been on-board. I’ve ridden the roller-coaster and fully enjoyed the ride. But it’s over.

Last night, Apple presented an earnings announcement that had some good news but a significant amount of bad-news for those who still haven’t let go of the dream.

So let’s take a look at what happened.

Cash on the Books

Cash fuels growth. Apple fans have been touting pile of cash that Apple has on hand. For most companies this would be significant. But Apple’s stock isn’t priced on traditional principles. It’s priced on insanely unbelievably amazing products that destroy existing markets and create new markets. But that’s a different company than the Apple that reported earnings last night.

This Apple increased its dividend to $3.05 a share and announced the largest stock buyback in history totaling more than $50 billion.

So I started by saying that cash fuels growth except Apple is spending its excess cash by doing things that mature, stable and low to no-growth big-cap companies do. They cater to investors.

There are a lot of opinions on whether and when companies should pay dividends but in my mind its very simple. A company pays dividends when its exhausted its growth. I invest in dividend stocks in my retirement accounts. For trading, I look for growth stocks. Once in a while, I’ll come across a company that shows signs of being both a growth and an income stock but that’s rare and typically doesn’t last.

Slowing Growth

Apple isn’t growing as fast as it was. You can suggest a lot of reasons for this but the fact is that Apple didn’t function like most companies. It created products that compelled consumers to go and stand in-line and camp out to buy them. Something that usually only happens for rock concerts and movies like Star Wars. I’m not completely sure, but I think I saw Darth Vader standing in line to buy an iPhone 4.

That isn’t happening any more. Net sales are down along with profits and I believe that this is simply the beginning.

It can be argued that the economy is to blame. Poor economic data from china has had massive impact on growth for global companies like Apple.

But there is something more fundamental going on. Apple has always played on its own field. It created markets and then dared others to compete with them. No longer. Now Apple tries to match price and features with other lower-end phones to be competitive. Never, as far as I can remember, all the way back to the famous Apple II have they tried to go head-to-head with low-end products.

It will be a sad day if they ever try to compete with Google (GOOG) Chromebooks. It’s simply not an Apple thing to do. Or at least it wasn’t.

Future Guidance

Tim Cook suggested that exciting products are coming. The problem is that Mr. Cook has a much different idea of exciting than Apple fans have come to expect. These products are expected to be announced in the fall making it a much longer period of time without something insanely great being announced.

On Replacing Tim Cook

There has been speculation that Tim Cook should be held accountable for the poor performance of the Apple stock. That would be both unfair and tragic. Before following up with that idea, you would need to consider who you would find to replace him.

Tim, by any other measure of performance, has done an admirable job. He has made sound management decisions. He knows the company and the market and under any other circumstances this wouldn’t even be a consideration.

But, he is operating under the shadow of the former Apple and a big shadow it is.

Conclusion

So what do you do with Apple as an investor?

I’ve been out of Apple since Steve Job’s health problems started surfacing. I’ve been waiting for it to settle into its new reality but while watching it, I’ve seen something that I haven’t seen in other companies. The Apple user-base just isn’t letting go causing this to be a protracted maturation process. I watched the same thing happen with Microsoft and it didn’t last this long or have anywhere near this amount of associated emotion.

The stock needs to find its new price but this won’t happen if growth continues to slow as I believe it will. The PE is more than acceptable but you need to maintain revenue to support it and they won’t be able to do that without continue to innovate which I believe they cannot do.

I think the other shoe will drop when they announce their “amazing new hardware, software and services” in the fall. If they don’t deliver on that promise in true Apple style, I think the transformation into a “just another tech company” will be accelerated and even the most die-hard Apple believers will have to admit that the show is over.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.