Morningstar’s bad advice: ‘pass on Apple Computer stock’

Mike Trigg sat down with stock analyst Rod Bare to determine exactly where Morningstar disagrees with the market on the case of Apple Computer, Inc.

“Many people believe the disagreement among investors over the future of Apple deals with whether or not iPod sales will increase Mac adoption and increase the firm’s PC market share,” Mike Trigg writes for Morningstar. “But it actually boils down to whether or not the company can continue growing iPod sales over the next five years, which would be one of the most remarkable achievements in the history of consumer electronics. After all, they’re all toasters in the end!”

Trigg writes, “There are several trends that suggest iPod sales will slow in the future. Competition is growing and the early-adopter phase is coming to an end, which typically means that sales will be driven by replacement purchases (think cell phones). Also, it will only get more difficult to drive demand with incremental product improvements. Lastly, some think Apple is a margin-expansion story, but we’ve seen little evidence of this thus far. Even management continues to talk down the prospects of Apple meaningfully expanding margins beyond their current high-single-digit level. As a result, until we’re convinced that the market has it right, we’ll pass on Apple.”

Full article here.
There are so many assumptions and errors in common sense in the thinking behind this article! If Apple continues increasing Mac unit sales at the rate it has been, the iPod becomes less important than many seem to think it is right now. Also, after the “early-adopter” phase comes “mass-market adoption,” so Apple’s iPod sales have an excellent chance of continuing to increase dramatically.

This past weekend we met several people (ages 25-50) who were intrigued about Apple’s iPod, planned to buy one, but our iPod was the first one they had actually touched. These people don’t know much about digital music players, yet, but they all seemed to know one thing for sure: they’re going to buy an iPod. Not a “digital music player.” An iPod.

Just shy of twenty-two million iPods have been sold worldwide so far – now how many people that might eventually want an iPod and have the money to buy one live in the U.S. alone? In Japan? In the world? This iPod thing is just getting started and those already looking for some artificial end to Apple’s iPod run are looking for the wrong thing in the wrong place at the wrong time from the wrong company. We won’t even get into what iTunes will eventually bring in — hint: it isn’t going to be a “break-even” business forever. It’s already turning a slight profit according to Apple’s last conference call.

If you’re an Apple shareholder, you shouldn’t be worrying so much about iPod sales, but you should definitely be praying for Steve Jobs’ health and well-being and that he keeps on doing what he’s been doing for the last several years.

24 Comments

  1. MDN Headline – January 2006:

    “Morningstar: ‘rates AAPL a buy’ Price target $60; sites explosive iPod and Mac sales growth.”

    You can quote me on that. ” width=”19″ height=”19″ alt=”tongue laugh” style=”border:0;” />

  2. “But it actually boils down to whether or not the company can continue growing iPod sales over the next five years, which would be one of the most remarkable achievements in the history of consumer electronics. After all, they’re all toasters in the end!”

    Trigg’s problem is that he, like so many, underestimate the “Computer” part of “Apple COMPUTER.” Apple iPods are great gadgets, and they are acting as bait to bring people to the Apple COMPUTER and the fantastic Mac OS, but they are not the be-all and end-all of Apple’s future. This “Halo Effect” is real, and the impact is only just now really starting to show itself, but the real star is the Mac OS. What will the pundits say when Mac’s PC market share has doubled it’s current level? Will they still be prognosticating about the iPod? Their current approach is that Apple’s growth depends upon the iPod and that, if iPod sale increases begin to decelerate in growth, that will spell the end of Apple. They’ve been saying this for a year, and their “indicators” have all been proven to be wrong. So-also are they wrong about this … as important as iPods are in helping the growth of Mac Market Share, it’s really the Mac OS that is drawing people, while a sucky virus plagued Windows OS is driving people away.

    MDN Magic Word: “high” … as in, expectations for the future of the Mac and other Apple products is “high.”

  3. eh, hem! Let us not forget that now that the iTunes Music Store is available in Japan that Apple has now gained a massive foothold in the land of the rising sun. Thus, More iPod sales to coincide support the iTunes Music Store purchases!

    Morning Star should be renamed to Morning Sickness! Idiots!

  4. This guy seems to be ignoring exactly how much room there is yet to grow. Seriously, even though many ipods have been sold, there is so much room for growth. Furthermore, as a platform, the ipod has built-in growth potential in terms of functionality– the same can’t be said of my toaster. If Apple offers firmware upgrades that offer increased usefulness over time, ipod owners will catch on that this company really enjoys the tech it is making– and that they care about the user experience. Most ipod owners have only gotten a taste of Apple. Soon, they’ll want more.

    It’s not exactly scientific, but I feel very bullish about AAPL for the forseeable future.

  5. “Competition is growing and the early-adopter phase is coming to an end, which typically means that sales will be driven by replacement purchases (think cell phones).”

    Yup, and what are we gonna buy? Another iPod… no issues with converting existing libraries or purchases…

    Jb

  6. If Apple is hold their lead in the market (with MP3 players) they need to establish themselves as Microsoft did in the OS realm. People need to be convinced that changing to another MP3 player (or download service) would cause too much disruption. Leading the market in the MP3 player race will help push computer sales, but ultimately Apple will not reach the masses of the computer buyers until they can offer a more competitive solution of the mac mini (where you still need to buy a mouse, keyboard and monitor).

    I like Apple, but they are still playing to “niche” market group. I’m not suggesting that they create crappy designs, but someone looking for a computer for grandma or their teens are not going to pony up over $600 for a system when they don’t properly understand overall cost and just see an inital price tag.

    Apple could remedy this by (1) better advertising (2) offering a mouse/keyboard (3) having cheaper monitors for sell.

  7. So, I will take issue with the following statement:

    “Lastly, some think Apple is a margin-expansion story, but we’ve seen little evidence of this thus far. Even management continues to talk down the prospects of Apple meaningfully expanding margins beyond their current high-single-digit level.”

    Obviously the author hasn’t done their homework or is idiotic enough to confuse MARGIN with MARKETSHARE. Apple’s margins have been in the high 20’s forever….. Get it RIGHT rookie!

  8. >From: Gredo
    >Aug 08, 05 – 10:00 am

    >And I’ve bought 5 of those 21 million.

    I’ve got 3. And guess what? I’m planning on upgrading very soon. Stopping there? Nope. I’ll be buying more as presents for family members this season.

  9. Another dumbass analyst who just doesn’t get it – it’s the software stupid. Without iTunes, iPod is just a cool portable device. But with the precision dovetailed iTunes software the iPod is a user experience that just keeps getting better and better as time goes by. Imho Apple, iPod and iTunes have almost single handedly reinvigorated the whole idiom of music and the music industry (which was headed down the toilet in profitability before iPod). Before iPod I had become completely disenchanted with buying CDs due to the high cost, marginal quality of the content and difficulty of previewing. Since getting into iPod I’ve rediscovered my own CD library and purchased over 150 songs from the iTunes music store in the last 1.5 years along with 3 iPods for me and 2 for my kids. I’ve discovered music and artists I didn’t even know existed thanks to Apple and iTunes. The competitors of iPod don’t understand the integration of the system – hardware, software and content. They’re floundering around making groovy looking devices and bundling software that will be residing in the “where is it now bin” all too soon and then what do you use to load up your cool looking Creative device – Napster? I doubt they’ll be in business much longer the way they are bleeding money. And finally, let us not forget that Sony road the Walkman brand to the tune of 150million+ gadgets sold.

  10. I read it earlier this morning and was struck how concrete their reasoning was. They could only see what was in front of them, while ignoring the managment at Apple that produced this surge. They are treating the iPod as a one shot wonder while assuming that Apple has nothing else up its sleeve and not even understanding how the iPod is continuing to change the music business. And you just know that sellers are going to be offering Intel Macs next year with free Windows software and they don’t even mention it. They can’t even see what is already on the table.

    And I used to think Morningstar was pretty good.

  11. All the analyst needed to do was buy an iPod. Download iTunes for his PC. Rip a few CD’s. Register and buy a few tunes from iTMS. Plug in, update and load his iPod. Go for a walk or run while listening to his tunes.

    Then repeat this with a new Mac right out of the box.

    Then he would slap his forehead and say, “Doh! Apple makes computers and software too!”

  12. So Mike Trigg knows what is correct, and the 18 Million shares that are traded each day for AAPL are all wrong — their price is too high, since according to Trigg it should be $29.

    If Trigg was such a genius, what is he doing writing articles? Warren Buffett finds the market wrong on a stock once every few years, yet apparently Trigg has no problem taking a stand here.

    The author is simply doing what everyone else is — arguing an opinion about the future stock price of a company. The “shorts” do it, the “longs” do it, and he does as well.

    Again, if he’s such the genius, why doesn’t he simply invest some of his paycheck, or short the stock in this case, and become a billionaire? It’s because of the efficient market, he’d be playing russian roulette. I trust 18 million shares a day to take all publicly known information and set the price, and not some human journalist. Put your money where your pen is, Trigg.

  13. Uh…Apple has 20%+ GROSS margins but ~10% OPERATING margins. Rookie?

    Also he said iPod sales would continue to grow significantly through the end of 2006 and then starts to slow. That is 18 more months of HUGE sales and then slowing. He is not arguing Apple is already at the point of slowing, so of course Apple still has a lot more room to grow. But lets talk again in in January 2007.

    Just wanted to clear up some misconceptions here. No offense intended.

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