Apple: Common Sense Ahead of Earnings

Investors now stare face to face with what has become the most terrifying day on the calendar: Apple (AAPL) earnings. Apple is leading the technology revolution with their innovation. They have transformed the music industry. They have transformed the cellphone industry. Their computers are selling at better than 6 times the industry average. The consumer slowdown hasn't touched sales. So why are shares down below $100? Why can't this stock separate itself from broad market fears? Will money ever return to high growth? Could Apple really drop down to the $80s after this report?

Questions like these are on the minds of investors everywhere; here is a dose of much needed perspective:

1. The New Mac TrackPad: Yet Another Game Changer

Go down to your local Apple retail store and check out the new trackpad. Again, Apple is showing consumers what they really want. Assumptions have been that Apple would progress the touchscreen success of the iPhone screen onto the Mac. Not so. It won't happen for two very important reasons. First, try holding your arms up directly in front of you for 5 minutes. Difficult isn't it. Now try doing it for the a couple hours. Impossible. In order for a touchscreen computer to work, human beings would have to develop a new muscle structure. Second, smears and smudges look a lot worse on a large screen than they do on a phone. The touchpad is the future. And HP thought they beat Apple to the punch with the release of the HP Touchsmart PC. Once again, Apple is leading the wave of innovation.

In their review of the glass touchpad, Clint Ecker and Jacqui Cheng conclude, "Apple has introduced one, two, three, and four-finger multitouch gestures with this machine—more than any previous Mac laptop. The usual ones are all there—two-finger scrolling, pinch and zoom, document rotation, and two-finger-right-click. But now, if you're using a new MacBook Pro, you can also use three fingers to go back and forth in Safari, for example (three finger swipes do different things in different applications). Four finger swipes let you switch between apps like you would with Command+Tab, and four-finger swipes up and down activate Exposé and/or expose your desktop. This doesn't seem like much to fawn over on paper, but once you get used to some of those four-finger swipes, you'll fall in love."

2. The App Store: Yet Another Game Changer

We haven't even had one earnings report that includes the App Store. With the launch of the App Store in early July, analyst Gene Munster believes the iPhone and iPod touch are actually on their way to becoming "superior gaming/application" devices. He noted that metrics data suggests iPhone users are 70% more likely to consume video on their phones, given the YouTube application that exists on the handset. "Applying this 70% higher likelihood to the rate of game usage for smartphones, we arrive at 75% of iPhone users engaging in downloading third party applications," he wrote. He predicts that the app store can become a 1.2 billion business in 2009. Pay special attention to App store numbers on the conference call. Thus far, everyone assumes these numbers will be as inconsequential as iTunes music. Not necessarily. Apple's opportunity to collect 30% on all games sold is a big deal.

3. HD Digital: Yet Another Gamer Changer

Last week Apple announced that ABC (ABC), CBS (CBS), FOX (NWS) & NBC (GE) have begun offering HD downloads of primetime programs in high definition on the iTunes store.

Some of the more popular programs include "Grey's Anatomy" and "Lost" from ABC, "CSI" and "CSI: Miami" from CBS, "Bones" and "Prison Break" airing on FOX, and "Heroes" and "The Office" from NBC Universal, consumers will continue becoming more comfortable watching these shows on their computer, iPod, iPhone and TV with Apple TV. The major studios would never jump on board unless they say huge upside potential.

4. Cash Accounting: The New Fad

Thanks in large part to the excellent investment analysis provided on seeking alpha, investors are now giving more credence to p/free cash flow metric of valuation instead of the more traditional p/e ratio. This new metric is more accurate of Apple's growth because of the deferred accounting method used for iPhone sales. For the first time, all investment eyes will be on cash. For Apple, this is a very good thing.

Conclusion

This stock could easily trade back above $150 in November. I know it seems like an eternity since Apple was at those levels but look at your charts and you'll discover it was at $140 last month and $170 only six weeks ago. This company isn't losing it's growth rate like RIM (RIMM). It's not under the consumer spending gun like Best Buy (BBY). And it's not lagging in innovation like Microsoft (MSFT). This is Apple. It's success deserves to be in a sector all by themselves. They have the fundamentals, they have consumer momentum, and they are out of favor on Wall Street. So what should you do ahead of this report? Take some advise from a guy who knows a thing or two about investing. Warren Buffett says you should be fearful when others are greedy, and be greedy when others are fearful. Apple below $100 represents the tower of terror. Fear of negative guidance has never been greater before an earnings announcement. These kinds of buys are the ones that can build real wealth. Buy and hold this one.

Disclosure: Author holds a long position in AAPL

Comments

[Portsman:]

I think you should check into how the iphone is selling in Russia.. very poorly....

2008 Oct 21 03:30 PM

[stocks:]

I like apple very much. I hope they will get better

2008 Oct 21 03:30 PM

[iJah420:]

Russia gets their iPhones via the Black Market.

The Russians r like Putin. They want something for nothing and if they do not want to pay for it they will steal it or back stab anyone to get it. Never trust a Russian.

When was the last time they created something worth paying for?

Don't see many tags in the U.S. that read "Made in Russia".

ijah420 says %^&$% Russia. Apple would do just fine without em' PA TOOE!!!

2008 Oct 21 04:05 PM

[Nose Dalton:]

Looks like your call was right on the money.
It was not a particularly brilliant call, but why did all the other financial writers and so called "analysts" miss this. They should be ashamed if they think they are professional.
No wonder the market is so messed up.
Thanks for helping my peace of mind!!!
Nose Dalton

2008 Oct 21 11:28 PM

[winindthedust:]

Looking at the REAL numbers, those including deferred revenue, Apple not just beat all of the "street's" consensus numbers, but blew them away, and left them in the dust!

Any "analyst" that ignores these real numbers, and only concentrate on the "missed" sales, is obviously trying to manipulate the stock. Actual sales was 11.68 billion, almost 4 billion MORE then the consensus.

This call was truly "stunning", we are adding to our position.

2008 Oct 22 10:27 AM

[mollytjm:]

great article! Apple is so different from any other company and i think that's why traders have not understood it. bogus scare tactics work when people don't understand something. But Apple is here to stay and its innovation is here to stay. Apple is no longer just Steve Jobs or one product. There are so many brilliant people in this company because if you want to do the best cutting edge research, where do you go? Apple. You certainly don't go to microsoft these days, unless you like doing a lot of repair work.
i'm long APPL ...this is a 'buy and hold' stock, esp. at these bargain prices.

2008 Oct 22 10:45 AM

[mollytjm:]

ps. to portsman: Hello! there are no Apple retail stores in Russia, making your comment completely invalid.

2008 Oct 22 11:39 AM

[brewer:]

Nice article, Jason. I have stopped reading many others that come across the SA emails. I just KNEW it had to go UP this time, glad there is someone else who sees it my way.

Did you see what MSFT did today? Could this be real a tipping point? I know MS ticked off many with their anti piracy warning, but I think there is more to their 8% CRASH (literally a crash for that stock that rarely budges) and I think it may have to do with Apple's continued, undeniable at this point, success.

2008 Oct 22 04:38 PM

[brewer:]

Also, of course RIM simply can't complete with iPhone. Storm, bold, might as well have been called 'Yawn' and 'Bored'.

And Google's 'g-Phone'? I think people were expecting something, you know, complete and that actually worked for a non-nerd. That certainly didn't happen.

2008 Oct 22 04:42 PM