BALTIMORE (Stockpickr) -- When Apple (AAPL) released its second-quarter earnings last week, shares rocketed higher on the results. Not only did Apple make money hand over fist for the quarter, but the firm also announced a massive $130 billion capital return program.
But after the pop, it didn't take long for Apple bears to chime in on why now is the time to sell take those gains. But are they right? Is it time to sell Apple now?
Not even close.
The very best reasons to sell AAPL are total bunk. Today, I'll show you why now is a great opportunity to add onto an Apple position -- not to unload shares.
This isn't the first time I've chimed in on Apple. And so I'll share my standard disclaimer: I own the stock. I'm not an "unbiased" journalist -- I'm an investment professional, and I'm talking my book. But that still doesn't make anything I'm about to say any less true.
Without any further ado, here's why the bears say you should sell Apple -- and why there are actually good reasons to buy more.
1. Apple Can't Innovate Anymore
Searching for the phrase "Apple can't innovate" returns a whopping 104 million results on Google. It's been one of the chief criticisms of Apple for the last couple of years.
And it's a fair concern.
After all, the last "blockbuster" product that Apple released was the iPad, which came out way back in 2010. We've been sitting through a long stretch of incremental upgrades and updates without a big new device release. But that's not out of line with Apple's previous new category launches: There were three years in between the iPhone's 2007 launch and the iPad's 2010 debut, and another six years back to the introduction of the iPod in 2001.
That haphazard release timeline is the result of a product lifecycle that's driven by innovation rather than some sort of marketing calendar. And yet somehow, it's out of the ordinary that one of the most secretive tech companies in the world hasn't pulled back the curtain on their next big launch?
Apple's historical launch timeline also jives well with Tim Cook's comments about Apple getting closer to entering a new product category in 2014. Consider this: If you'd sold Apple four or five years after the iPod was released, you'd have missed out on the iPhone because "Apple wasn't innovating anymore."
Even if new things are on the way, there are still some real concerns about sluggish innovation hurting market share in existing categories, such as the iPhone. In the last year, Apple's share of the smartphone market slipped from 17.5% down to 15.3% according to data from Strategy Analytics.
And that's a real cause for concern -- if you don't understand Apple's business.
Apple's smartphone strategy is hidden in plain sight: It's identical to the firm's approach to selling computers. 30 years after its introduction, the Macintosh line still only accounts for around 5% of global estimated PC shipments. In fact, Apple is not even in the top five computer manufacturers.
But meanwhile, the biggest PC makers have watched their profits disappear as PCs became a commoditized race to the bottom on price. By focusing on the high end of the market and building a deep economic moat, Apple's tiny market share earned around half of PC industry's total profits last year.
Likewise, the iPhone was never meant to cater to everyone. It was meant to cater to the same price-insensitive mass affluent consumers who buy Macs. So while Apple's smartphone market share has fallen to 15.3% thanks to a flood of dirt-cheap handsets in emerging markets, Apple still collects an estimated 87.4% of all smartphone profits according to Tavis McCourt at Raymond James.
Back when the iPhone was one of the few true smartphone options out there, of course its market share was higher. But market share just isn't a meaningful metric anymore. "The market" now includes too many consumers that Apple doesn't care about courting. Meanwhile, iPhone shipments continue to tick higher on an absolute basis.
2. The Stock Split Won't Do Anything
A key part of Apple's earnings call was the announcement that the firm was cutting up its stock into more pieces through a seven-for-one stock split. That means that each $592 share of Apple today is going to be adjusted to seven $84.57 shares of Apple on June 9.
Any academic can tell you that the split won't actually fundamentally change anything about Apple's stock. It'll just break each share into smaller pieces. But when it comes to the markets, what should happen in theory is often very different from what does happen in practice.
Anyone who thinks that stock splits don't matter has never had a client throw a fit because a stock price was "too expensive". Yes, it happens.
And you can bet that investor psychology will have a big impact on how the lower-priced stock trades. It's also no coincidence that Apple basically indexed their new share price to the $700 high water mark that shares hit back in September 2012.
That gap is going to feel a whole lot easier to fill at $15 than it does now at $107.
3. The Buyback Is a Waste of Money
Apple's decision to throw another $30 billion in its buyback pot is catching some heat in the wake of last week's earnings call. After all, shouldn't the company be using cash to invest in new business segments?
As I've said, there's no evidence of an innovation drought at Apple -- and even if there were, historically Apple's acquisition strategy has focused on buying small technologies that it can integrate with its own offerings -- not big, transformative M&A deal like its peers. I'd be very worried if that suddenly changed and Apple wanted to use a big chunk of cash for acquisitions.
Instead, the most pressing problem for Apple to fix with its $150 billion in cash and investments is the deep discount on shares. Right now, the firm's cash hoard pays for approximately 26% of the firm's outstanding shares.
That means that Apple's best acquisition target is itself.
Through 2015, the firm plans on returning $130 billion in cash back to investors through dividend payouts and share buybacks. Ex-cash, Apple's price-to-earnings ratio is just under 10. For comparison, U.S. tobacco giant Lorillard (LO) and newspaper firm Gannett (GCI) each sport almost double that earnings multiple -- so unless you think U.S. tobacco and newspapers are better growth opportunities in the next few years than Apple, this stock still sports a dirt-cheap valuation after the last week's rally.
Buying back shares to concentrate shareholders' ownership stakes makes a lot of sense, and it comes at no cost to Apple's product pipeline.
4. It's a Crowded Trade
A few years ago, Apple was a crowded trade. Back in 2012, the combination of a huge market capitalization and strong stock performance meant that more than half of all large growth mutual funds had at least 5% of their assets in Apple. In short, everyone owned it, and no one was left to buy shares.
But Apple isn't over-owned today. It's under-owned.
According to Morgan Stanley, institutional ownership of Apple's stock has reached a five-year low. Apple is the only large-cap technology company whose current exposure in professional portfolios is less than its weight in the S&P 500. So while portfolio managers are overweight Amazon.com (AMZN), Google (GOOG), and Microsoft (MSFT), they're way underweight Apple.
For the last couple of years, there's been a big disconnect between "Apple, the company" and "AAPL, the stock" -- but the disconnect is starting to right itself. That's precisely why four of the biggest reasons that Apple bears still hate this stock are the exact reasons why you should want to buy it in 2014.
My money is (still) where my mouth is.
-- Written by Jonas Elmerraji in Baltimore.