Don't Buy Apple's One-Trick iPhone Pony

On Tuesday I described some reservations I have regarding the market's reaction to Apple's (AAPL - commentary - Cramer's Take) iPhone.

While some have criticized my pricing and keyboard concerns, the real objection seems to be to my statement that Apple's shares have benefited from a nearly $20 billion incremental rise in equity capitalization from last week's MacWorld announcement.

In actuality, that was being conservative. I would say there was more than $5 to $10 of pre-announcement hype built in to Apple's share price, and then the stock rose another $10. With 870 million shares outstanding, those two pops represent $4.3 billion to $8.7 billion and $8.7 billion, respectively, which is how I arrive at nearly $20 billion in hype.

I believe those who have objected to my view are wrong. Here's why.

Were it not for the success of the iPod, Apple's growth rate would have plunged over the last two years. (You could argue that the iPod's growth rate, too, is decelerating, albeit from a lofty rate of growth.)

If you doubt my assertions on Apple's non-iPod growth, turn to page 54 in Apple's 10k, which highlights the dollar and unit sales contributions by product line and geographic region.

From 2004-2006, iPod unit sales rose from 4 million to 39.4 million, representing unit gains of 75% in 2006 over 2005 (69% in revenue) and gains of 409% in 2005 over 2004 (248% in revenue). During the same period, Apple's desktop sales rose from 1.6 to 2.4 million units -- a loss of 3% in 2006 over 2005 (-3% in revenue) and a gain of 55% in 2005 over 2004 (45% in revenue) while Apple's portable products unit sales rose from 2.6 million units to 4.05 million units, representing unit gains of 42% in 2006 over 2005 (+43% in revenue) and unit gains of 11% in 2005 over 2004 (11% in revenue).

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At time of publication, Kass and/or his funds had no position in stock mentioned, although holdings can change at any time.

Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd. Until 1996, he was senior portfolio manager at Omega Advisors, a $4 billion investment partnership. Before that he was executive senior vice president and director of institutional equities of First Albany Corporation and JW Charles/CSG. He also was a General Partner of Glickenhaus & Co., and held various positions with Putnam Management and Kidder, Peabody. Kass received his bachelor's from Alfred University, and received a master's of business administration in finance from the University of Pennsylvania's Wharton School in 1972. He co-authored "Citibank: The Ralph Nader Report" with Nader and the Center for the Study of Responsive Law and currently serves as a guest host on CNBC's "Squawk Box."

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