Apple is a Bubble

Is the iPhone and iPad creator about to burst? That depends on who you talk to. But if you ask Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research, he'll give it to you straight: the company may not burst, but don't expect its stock to go to $1,000 per share. “The gap on the desktop side between Apple AAPL and Microsoft MSFT is going to get narrowed,” Chowdhry told Benzinga. “We need to keep an eye on [the way] things have slightly changed at Apple. The decisions are taking longer, and there are more meetings happening than before. Apple today is probably not exactly what I would claim is Steve Jobs' Apple.” Earlier in the week, Chowdhry provided a list of bull and bear cases for the Mac maker: Apple Positives: Bull Case

• (+) “The new iPad jumpstarts a new product cycle for Apple.”
• (+) “MacBook Air is starting to have strong enterprise adoption.”
• (+) “Apple iOS iPhones are displacing Blackberry Phone.”
• (+) “Apple iBookStore off to a very strong start.”
• (+) “Apple iTunes sales, which include [the] iPhone App Store, iPad App Store, iBookStore, and traditional iTunes Music Store, may continue to show a CAGR growth of more than 40% over the next three years.”
• (+) “Apple's innovation velocity far exceeds anyone else in the industry.”
• (+) “Apple may return some excess cash to the shareholder in some form of [a] dividend.”

Apple Negative: Bear Case

• (-) “Post-Steve Jobs Apple – Converged view is that there is about 10% to 15% more staff meetings now than before. Typical decision [making] process is taking an average 15 days more.”
• (-) “New Hires – Fresh college graduates prefer to join Facebook and Google. Apple is third on their list.”
• (-) “Lateral Hires – Apple has been successful in hiring some talent from Cisco CSCO, but it seems like VMware VMW is able to attract more lateral hires than Apple. Lateral hires seem to have preferred VMware to Apple.”
• (-) “The early indications are for strong launch of the New iPad, but it is not clear if the momentum can sustain itself in a high gasoline price environment. Will the consumer pause on buying the next iPad, while they are getting hurt because of the higher gasoline prices?”
• (-) “Apple iPhone fatigue; form factor is heavy, bulky, and is getting to be boring.”
• (-) “Apple Patent enforcement against Google GOOG Android has significantly weakened following Google's acquisition of Motorola Mobility MMI. Apple has only about 1,300 patents in [the] mobile space, while Google now has more than 17,000 patents in [the] mobile space. Google today is in much better position not only to defend Android, but probably also exert IP claims against Apple.”
• (-) “Apple HDTV has probably [gotten] delayed to October, and chances are that it may not even come in 2012.”
• (-) “Apple Software lead in the desktop may get narrowed with the launch of Microsoft Windows 8.”
• (-) “To some extent, Apple's success can be attributed to Apple retail stores. Microsoft has been building its retail stores, and in some instances Microsoft retail stores are next door to Apple retail stores. Microsoft Retail strategy may negatively impact some Apple Retail sales.”

“Let me tell you: if you look at the bear cases – I'm not saying the positives outweigh the negatives, or negatives outweigh the positives – the reason we put this report out was because there's so much noise,” Chowdhry told Benzinga this afternoon. “[As] you see, analysts are putting the numbers out [and] nobody's talking about any of the negatives at all. What could be the negatives? The [previous] list [shows what] could happen.” Chowdhry said that we have to remember that while iPads are “totally revolutionary,” they are also limited in functionality. “It is not a replacement for a PC for many users,” he said. “And what we need to keep an eye on is… There is an indication that – not MacBook Air but MacBook Pros and regular iMacs sales – may get cut. There may be a substitution effect in place. iPads could be….cannibalizing their own Mac sales.” If that's true, Chowdhry said that we will come to know this very soon. “We will probably [know] this quarter,” he said. “And if that happens, then probably the $1,000 that people are expecting probably will not happen.” Too Big For its Own Good Long-term, Chowdhry worries that Apple could become too big for its own good. He predicts that if Apple does go to $1,000, the company would lose a large portion of its workforce. “A company that's that big of a size, there will be at least 15% to 20% of people who will leave the company because they don't see themselves fit for such a large company,” he said. “That's one thing. The talent will move away. The talent sticks in certain companies because of its culture and size and they think they can influence.” Chowdhry said that for a company to go to $1,000, Apple would probably have to increase its employee base by 60% in the United States. “Basically the number of employees would have to double,” he said. “And if the number of employees double, then what? People at Apple like to associate themselves with like [minded] thinkers with the same intellectual way of life. And, depending on how fast you think the stock goes to $1,000 – I don't know, I'm just [surmising here] – if Apple goes to $1,000 in the next three years, I can bet my life on it and tell you [that] you will not be able to get another set of employees with the same capability, the same culture, the same intellectual way of life, in the next three years.” And then you'll be stuck with people who are “not smart,” Chowdhry warns. “One of two things happens,” he continued. “Either the not smart people go away. Or the smart people feel frustrated and they go away. Why that's an issue is the hiring. Students… The first offer they would like to get is for Facebook. Second, they'd like to work for Google GOOG. Third is Apple. It's not top on the list. So if you're not the number-one destination for new hires, then it's a problem to reach $1,000 because you are only going to get the second- or third-tier talent.” Chowdhry noted that Apple has been successful in hiring talent from big companies like Cisco. But he said that if an employee had an offer from two places, Apple or VMware VMW, they chose VMware. “Could it be because VMware is a good company or maybe the salary is better or the products are better or the people are better?” Chowdhry questioned. “We don't know. But we know the result.” “What would it take to reach $1,000?” Chowdhry asked. “We have to look at not the demand side but the delivery side. What does that mean? Employee base has to double. The quality of the employee base has to be far superior… I doubt that can happen because as I mentioned, new talent is going to Facebook or Google and then Apple. The talent story is not in place for $1,000.” Follow me @LouisBedigian