Doug Kass: Say No To Apple

Well-known Apple (NASDAQ:AAPL) bear Doug Kass wants to repeat his advice that, despite the low price, the iPhone maker is not a good investment idea at the moment. According to Barron’s, the SeaBreeze Partners president writes in a note that Apple faces several risks, including the much-mentioned loss of its leadership as an innovator, the slow erosion of its ecosystem, and the domestic saturation of its famous retail stores.

Kass adds that while he bought some Apple stock at the start of this week on Monday, he sold it on Tuesday at a profit because he continues to be of the view that the company’s profits and revenue will fail to meet consensus expectations. According to the hedge fund manager, Apple will turn in $181.71 billion in revenue this year at earnings per share of $41.92 and a gross margin of 38 percent — all figures below current Wall Street consensus levels.

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Apple’s is under threat from its rivals, Kass says, and is set to lose its advantage of having a sticky, isolated, and valuable ecosystem.

“The gap is narrowing between Apple products and competitors such as Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT),” Kass writes. “For example, the processor speeds, battery life, and weight of the products are becoming indistinguishable and will no longer provide Apple with an advantage. Eventually, third-party software will allow convergence between Apple products and Google’s Android system and/or Microsoft Windows 8. One of Apple’s key competitive advantages will be eliminated when this eventually occurs.”

The portfolio manager goes on to add that while the U.S. is now saturated with Apple Stores, opening and running new outlets is turning out to be too costly for the company. “Based on estimates from press releases, the company has opened over 400 Apple retail stores,” he writes.

“The increase in selling, general, and administrative costs can be associated with the store launches. There is a strong positive correlation of 0.93 comparing store openings with SG&A [Selling, General, and Administrative Expenses] costs. The company is opening more stores internationally, while the domestic market is reaching a saturation point,” he adds.

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There are more reasons for worry. According to Kass, Apple’s revenue has increased by a compound annual growth rate of 35 percent from 2006 to 2012, but research and development costs have also gone up by 25 percent. And while the consensus estimates peg future revenue growth at 12 percent, his own estimates suggest it will be closer to 9 percent, “given the cited factors of narrowing competitive advantage.”

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