The Slow But Steady Decline of Apple?

My apologies for not posting anything for the last little while but I have a thought that might make it worth the wait...

My bold prediction is this: Apple stock price will drop by 50% within 3 years time.

I know what your thinking... Apple is one of the most valuable and recognizable brands out there. Everywhere you look, someone is playing with their iPhone, iPad, switching songs on their iPod / Shuffle, typing away at the local Starbucks on their Macbook or changing channels on their Apple TV. But I ask you this, when was the last truly ground breaking device that Apple has come out with in the last 3 years? Ever since Steve Jobs ceded his role as CEO to Tim Cook in Fall 2011, the company has simply stopped innovating. 

Not only did Apple used to be one the most admired technology companies in the world, but one of the greatest period. I won't go into what a genius Jobs was as we all know what he was and what he represented. The discussion here simply surrounds why Apple, dare I say it, may go the way of beloved tech darling Research in Motion within 3-5 years if it doesn't start bringing category breaking products to market. Sure in its most recent Q2-14 earnings release, the Company beat estimates on both top line ($45.6 billion in reported sales vs. an average estimate of $43.6 billion) and bottom line ($11.62/share vs. $10.16/share expected). Further, the Company continues to hoard cash like its going out of fashion with $156 billion on hand at the end of the quarter. The company topped it off by announcing a 7 for 1 stock split which will allow more mom and pop investors to afford the stock and possibly add fuel to its share price and announced a 15% increase to its dividend which at $3.29/share, or 2.2% on an annualized basis, (based on a closing price of $592.58 on May 2/14) makes it attractive to yield hungry investors.

However, there were also some warning signs that did not sit well with me:
- iPad sales for the quarter continued to decline with a drop of 16% year-over-year with 16.35 million units sold compared to 19.7 million units expected by analysts (iPad sales make up roughly 25% of its revenues). Samsung continues to eat Apple's lunch in this regard with its share of the tablet market increasing to 26% at the end of Mar/14 compared to 32% for Apple
- Although ASP for the iPad of $465 was above the $430 expected by analysts it represents a far cry from an ASP of $660 in Q2 2010 back when the device was first came to market 
- As can be seen from the graphs below, Apple's TTM revenues have flattened considerably over the last several quarters


(Source: www.businessinsider.com)


(Source: www.businessinsider.com)

- iPhone sales growth rates have also begun to decline (though part of that is due to the fact that its harder to grow from a higher bases) but nevertheless, a disturbing trend

(Source: www.businessinsider.com)

By and large, Apple is clinging to the success of one product (the iPhone). To this point Samsung, HTC and LG have all brought feature packed Android based phones to the market over the last few years at a much more reasonable price point and thus is eating into current and future share.

Apple used to be a four headed monster with multiple ways to win and its shareholders were handsomely rewarded. Shareholders did not need to be enticed to own the stock because its product line up and cutting edge innovation did the talking. However, since the introduction of Cook, the company has introduced a dividend, bought back stock (which is proven to add nothing to shareholder value) and introduced a 7 for 1 stock split (financial tricks which Jobs would have puked over) all in an effort to win back shareholders. 

Apple used to be its own asset class. Now? It's being lumped with all the other sleepy tech giants (i.e. Microsoft, Intel, Cisco, HP etc). Simply put, Apple needs to get back to its old "category breaking" ways quick or investors will soon lose patience and the stock price will plummet (just as RIM's did). Luckily for Apple, their massive cash pile will "buy" them some time. Here's a novel idea... Why not go on a buying spree and buy some revenue and innovative spirit? I do admire Apple as a tech company but given its stagnant ways, would not touch the stock with a ten-foot pole no matter what financial shenanigans Cook and his team pull to prop up the share price...

My Take on Financial Advisors

The investing world can be a truely scary place, especially for those who lack the knowledge and know-how to navigate it effectively which is why the wealth management industry has become such a revenue generator in Canada who capitalize on this misconception. Further, with the aging of baby boomers over the next decade or two and increase in the overall expected life expectancy, this will surely provide an added boost to the industry for years to come. 

Luckily, knowledge of investing tools, markets and business in general are concepts that be easily obtained through the reading of a few finance books (the Intelligent Investor, Security Analysis and Wealth of Nations to name a few) and/or through reading of articles online (SeekingAlpha.com is a great website to start).  With the proliferation of the Internet, there is now an endless array of infomation out there for those interested such that there should be no excuse whatsoever to not take charge of your destiny and invest in your own future.

However, many still choose to entrust their hard earned money with a financial advisor who supposedly have your best interests at heart. I won't get into my true feelings about "financial advisors" but what I will say is that advisors are incentivized to make money and make investment decisions and recommendations to people like you and I with that sole purpose in mind. Sometimes, your financial interests and goals (i.e. to build a nest egg for retirement) and theirs (to get filthy rich) are aligned, while at other times they are most definitely not. Perform a simple Google search on "Financial Advisors" and I bet you will find numerous horror stories of people who entrusted their life savings to an FA only to see their savings dwindle or vanish. Don't get me started on ponzi and/or other elaborate investment schemes with promises of a guaranteed annual return. If an advisor ever promises or strongly suggests that the past performance of a fund or investment can be repeated, you should turn and run the other way!

As with any other industry, there are always a few FA's out there that really do know what they are doing, have you best interests at heart and are looking to align there interests with yours (or at the very least - not against yours). Advisors who charge a flat monthly fee independent of AUM are a starting point. I would stay away from advisors who charge performance based fees as this type of arrangement encourages excessive risk taking on the part of the advisor.

The question every investor should be asking themselves is this: given that the advisor you choose, may or may not have your best interests at heart why would you "take a chance" on somebody when a little bit of research and reading can arm you with the necessary tools to be a successful investor? To those that ask for my advice on what to invest in, I always offer up this simple advice: if you don't have the time to manage your portfolio then invest in an indexing ETF as in doing so you would have already outperformed over 75% of the FA or asset managers out there.

Sure, there are times when investing with an advisor makes sense, these include:
1. If you work in a very demanding job such that you simply don't have the time to devote or energy to doing due diligence and research on stocks then working with a qualified and experienced advisor who works on a flat fee basis may make sense.

2. If you are highly emotional and can't trust yourself to be disciplined enough to ride the ups and downs of the market then a steady-handed advisor who has been around long enough to ride through numerous market ups-and-downs may also make sense.

However, if you do choose the FA route, do not employ the "set it and forget it"  strategy but frequently (at least quarterly) re-evaluate your relationship with your FA to ensure it is working for you, that you and him/her meet at least quarterly to go through your Investment Policy Statement to ensure that your risk and return constraints have not changed since your last meeting and that you are happy with the answers you are getting.

Why are Fantasy Sports are so Addictive?

As I sit back and edit my Yahoo Fantasy Basketball roster, scroll through the free agent player listing to see who is available for pickup, analyze numerous player game logs, team schedules and click through the roster list for each manager in my league to see who I can trade with to beef up my team I wonder to myself this: Why are Fantasy Sports so addictive and why do I (and countless others worldwide) spend so much time glued to our screens in the pursuit of Fantasy Sport greatness?

To sports fans, I believe Fantasy Sports is an extension of our interest in professional sports and to fulfil our dream of owning and managing our own sports team turned into reality. Where else does one get the chance to draft their own ideal or "dream" team and face-off against other team managers? Or can it be because we, as humans, have a desire to feel like we're part of something, part of a team, wanting to belong and to share in similar interests with others? Fantasy Sports allows us to do that too as we compete with other managers (in leagues of varying degrees of competitiveness) with friends, family and co-workers. Or is it simply to satisfy our desire to win (for bragging rights or for money), to be good at something and for the right to call yourself the "champ"?

Believe it or not, Fantasy Sports has roots dating back to the 1960s although popularity of the "hobby" didn't begin until the late 1990s, driven by the Internet boom, with the participation rate growing to 30 million. As of 2012, approximately 40 million people worldwide were managing fantasy rosters having an estimated $5 billion annual economic impact on the sports industry. Fantasy Sports has grown into such prominance that there are now dedicated TV channels, websites and commentators devoted to helping you pick and draft the best players, analyze proposed trade offers and manage your team on a week-to-week basis. Websites like Rotoworld.com are now commonplace with the goal of helping managers better there team (not to mention their own wallets). 

The "hobby" has grown into such popularity that some are even making a sizable six figure living off of it. Check out the link below:

http://ftw.usatoday.com/2013/10/dream-job-fantasy-sports-players-turning-game-into-six-figure-career/

One can only hope ... Till then, I'll be keeping my day job ...

RRSP What?...

As many of you Canadians may or may not be aware, we are currently nearing yet another RRSP deadline with the 2014 RRSP deadline being March 3rd. However, as I reflect upon my own personal savings habits for the year and how little of my hard earned money I'm able to set aside for a rainy day or dare I say it, retirement (or so it seems). I couldn't help but wonder how other Canadians were fairing in this annual uphill battle to save our hard earned money for something that is, at least for myself, in the distant future. So in order to fulfil my own curiosity I dug up some numbers in an attempt to answer my own question.

Let's start with our top line, the amount of money we, as Canadians, make annually. The answer to that question, which may be surprising to some is roughly $48,000 for 2013. For simplicity sake, let assume we are talking about an average Canadian and not a household. Right off the top, the CRA takes 31% (the effective marginal tax rate can be close to 50% for someone earning in excess of six figures!), so we are left with $33,120. Take off $3,360 (roughly 7%) for CPP and EI contribution and we are left with net take home pay of roughly $30,000 per year.

Assume, this individual has just graduated, in his or her late 20s and lives in downtown Toronto and pays $1,200 a month in rent (assuming no roommate situation) so we are left with $15,600. Let's assume now that this individual lives simply and not an overly extravagant lifestyle, monthly costs would include: $50 cell phone, $50 Internet, $250 for food, $250 in entertainment, $200 other expenses. Therefore, after covering the bare essentials and living on your own this individual, making the average income has net savings of $6,000 per year.

Obviously, I may be over simplifying things a bit here for example if this individual lived with his or her parents and did not have to pay rent which would obviously materially increase this person's net savings. Conversely, if this person had to commute into work via Go Train or car which would obviously lower their net savings. However, if even in the most optimistic scenario an "average" Canadian is only able to save on aveage $500 a month why on Earth do we care that the maximum RRSP contribution room is $25,000 or $5,500 for TFSAs and dare not mention saving for a house?  

This doesn't even take into account if this individual was married, had two kids and therefore, two mouths to feed and RESPs to worry about. How can we think about, as the big banks would like us to, "saving for our future" when the average Canadian can barely make ends meat? Just my humble opinion...

Candy Crush Goes Public!

The creators of Candy Crush, the ever addictive candy puzzle game, King Digital Entertainment is planning an initial public offering sometime this year that will give the Swedish based company an estimated valuation of close to $10 billion. Is it just me or does it seem a bit obscene that a simple candy puzzle game could create so much hype and generate so much revenue for such a little known company? Of course King does have other games in its stable (Pet Rescue Saga ring a bell?) but the worldly popular candy puzzle game is by far its greatest success to-date.

With the monumental success of Candy Crush over the last two years, 2013 revenues have grown over 11 fold (close to 1,150%) to $1.9 billion from just $164 million in 2012. Candy Crush has grown from a little known game where players are asked to complete different tasks, to an international sensation now attracting 93 million daily users worldwide. Although, its second most popular game (Pet Rescue Saga) attracted 15 million daily users, King is otherwise largely a one trick pony.

Although Candy Crush, and as a result King, has experienced much success to-date its target consumers, the younger generation, are a fickle bunch. What is popular one day is boring the next. Just look at Zynga, which became public in late 2011 on the back of its popular Facebook based game Farmville which drove its share price to $15 by March 2012 only to be followed by the inevitable crash which saw its share price crater to $2 a share by the following November 2012. Today, the company is still struggling to get back to its IPO price of $10.

I am not saying that you should not purchase shares of King when it does become public, but you should do so with capital that you are comfortable losing otherwise earmarked for speculation. Personally, my wife and I are both frequent players of Candy Crush but are both very careful with our money and therefore have never spent a cent on the game (though the temptation has always been there). Therefore, I personally would never purchase King shares. Further, with a proposed valuation of close to $10 billion, the market is already valuing the company at close to 5x revenues. Comparably, Zynga debuted with a valuation of roughly $7 billion with sales of $1.1 billion valuing it at over 6x sales so comparably speaking, King is coming to the market a bit cheaper. However, it could also be that the market has learned from its mistakes and has taken a more careful approach to valuing King. Further, given that Zynga actually decreased to below its IPO price shortly after coming to market, you can be certain that its advisors will be working hard to price its shares attractively and/or offer less shares in order to ensure a successful debut.

Even so, I would be highly skeptical in investing in this one...

Housing Affordability...

Last week, the Canadian Real Estate Association released its national home sales update for the month of January and reported its 5th month-over-month sales decline and a 3.3% decline compared to December. Of note though is that the national average sales price actually rose (based on data prepared by a not so unbiased source, i.e. the association representing realtors in Canada) 9.5% on a year-over-year basis.

Follow the link below for the press release:
http://crea.ca/canadian-home-sales-moderate-further-january

CREA's interpretation of the data is that harsh January weather had an impact on buying demand, but could it be that simple? Or could it be due to the fact that house prices are becoming just a bit out of reach for first time home buyers which make up about half of total home purchases in Canada.

A decrease in sales volumes is typically positively correlated with a decrease in sales prices. This means that as sales volumes increase or decrease, housing prices tend to follow suit as home buyers are more willing to accept a lower price in order to sell there homes. But the data presented does not appear to be consistent with that train of thought. There may be a number of reasons for this namely: sellers remain confident in the continued strength in the Canadian housing market and therefore refuse to budge on their asking price and thus, sales discounts are not appearing nearly as frequently as one would expect in a market where many economists are calling for a bust in the Canadian housing market. Secondly, it may be due to the continued strength in the Vancouver and Toronto housing markets which represent the most and 2nd most expensive housing markets in Canada.

The article below is a prime example of the housing craze being experienced Canada and our infatuation with home ownership:
http://www.thestar.com/business/real_estate/2014/01/22/westend_house_attracts_32_bids_sells_for_210000_above_asking.html 

Nevertheless, this data point should serve as fuel for fire in the argument for an inevitable collapse in the Canadian housing market.

Here Goes Nothing...

First off let me start by saying that I have never started my own blog before. I have no clue what I am doing but merely starting this page as a way to share my own personal knowledge about random business topics and other musings. I welcome all opinions on any subject matter discussed or opined on this site so feel free to send me a note or e-mail with any comments or questions that you have and I will do my best to respond.

My background is the world of business, finance and accounting. I have earned my CA and CFA designations and thus believe I have some degree of knowledge over business related posts on this site so hopefully you feel the same way!

Lets start this journey...