Apple: Sell Before the Fall

CUPERTINO, Calif. ( TheStreet) -- Apple ( AAPL) -- purveyor of hip, the gadget maker with the golden touch -- has seen its stock price hit two new highs in the past week. In fact, Apple has been on a winning streak for the past decade, ever since its audacious co-founder Steve Jobs reclaimed the top post. Apple's long ride atop the pinnacle of cool has a can't-miss quality to it; a gravity-defying feel of permanence.

But beware of the backlash.

While hard to picture now, Jobs and company will one day, maybe soon, fall out of step with fashion. Growth will stall. Fair-weather investors will flee to sunnier stocks. Loyal fans will become embittered. Smelling blood, critics will get even nastier.
Apple

It's inevitable. The life cycle of tech giants is brilliant and brutally short. Today's consumer electronics leaders are tomorrow's fossils. In the 1970s, Atari was considered infallible, bringing video games out of the arcade and into the home with joysticks and consoles. But by the 80s, rivals Sega and Nintendo got the hot hand, and Atari was deemed uncool.

Cool is the whipped confection that Jobs has built the Apple kingdom on, but even the sweetest empires fall.

Apple shares have had a tremendous run, and here are four reasons to sell the stock and bank your gains.

Macs

When the Microsoft ( MSFT)-powered PC industry became bogged down under the weight of Windows Vista and virtual pounds of bloatware and spyware, Apple Macs hit their stride as a sleek, simple, bug-free alternative. But today, thanks to a more stable Windows 7 operating system that borrows some good looks from Apple, PCs aren't so bad anymore. The rush to convert to Macs has quieted down thanks in part to a bevy of improved PCs.

Numbers

Apple's market share slipped slightly in the fourth quarter to 7.5% from the 7.7% level it held in the year-ago period, according to Gartner. A big hurdle to Apple's mass market success is its incompatibility with PC software, but an even bigger barrier is the shocking contrast in prices. You can buy two PCs for the price of one Mac. According to Technology Business Research, the average Mac goes for $1,309, while the average PC goes for $570.

iPhone

The third year is a charm. The fourth year will wear thin. Apple's 4th version of the iPhone -- not to be confused with a 4G iPhone -- is due this summer, and it's not likely to be any different than the past three. Meanwhile, thinner phones have arrived like Google's ( GOOG) Nexus One, and bigger, brighter screens from the Motorola ( MOT) Droid have beaten Apple at its own game. No wonder why Apple fought back last week, charging Android phone maker HTC with patent violations.
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Current speculation holds that the new iPhone will have a user-facing camera for video calls. One thing it won't have: Verizon ( VZ), the nation's biggest wireless camp with some 91.2 million customers. AT&T ( T) seems to have extended its exclusive iPhone selling agreement through the end of the year, delaying the liftoff of the Verizon iPhone.

Numbers

Apple says it has sold 40 million iPhones and analysts estimate the company enjoys lavish 58% gross margins on the device. In comparison, Research In Motion ( RIMM) sees 43% margin on its BlackBerries. The iPhone is a lucrative franchise for Apple and its strongest growth engine. But without a new market -- like the one Verizon would open up -- or a striking redesign, holding these peak levels will be a challenge.

iPad

After working on its highly-anticipated tablet device for three years (or more), Apple unveiled an expensive e-reader. While there's no doubt that this is just the first model of Apple's new tablet family, the iPad is a disappointing effort that fails to live up to the hype. The iPad is both an oversized iPod Touch and an under-powered netbook.

Hitting stores on April 3, the iPad is aimed squarely at the Amazon ( AMZN) Kindle. Apple has a history of making bold attacks on humble devices; the iPod crushed MP3 players, the iPhone vastly improved on cellphones, and no doubt e-readers will never be the same again. Sony ( SNE) must be quaking in its galoshes.

Numbers

The iPad price starts at $500 and tops off at $830 with 64 gigabytes of memory, but 3G wireless capability costs extra. By comparison, the Kindle sells for $260 with 2 gigabytes of memory; 3G wireless service is included. Apple shares fell 7.6% in the two days after the company unveiled the iPad. It's clear that thousands of people want a thin, color-screen reading tablet, but it's not clear that millions need it.

Recap

To recap the bearish scenario:
  • PCs are back, which leaves Macs as the yuppie equivalent of BMWs. Paying twice the price for a computer can only be so cool.
  • The revolutionary iPhone is getting stale. No fresh market, no fresh phone. Androids are looking like an Apple antidote.
  • The iPad is a not so "magical" e-reader. Expect to hear a lot of: "I spent a cold night in line for this?"

Apple thrived during the downturn on the strength of a great Mac and iPhone product cycle, earning its 145% stock appreciation last year. Today, with the stock around $200, Apple sits at a lofty market value of $189 billion, 57% more than PC giant Hewlett-Packard.

Investors like to call the stock's premium valuation "the Apple tax."

It might be time for your refund.

--Written by Scott Moritz in New York.

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