Apple's Surprising Jump After Bleak Guidance

I closed out the Apple (AAPL) position in my blog model portfolio in August at more than $180 per share after a 52% gain and also trimmed my clients' AAPL holdings at that time, but after the stock has been beaten up in the latest sell-off, searching for a re-entry point seems like a worthy endeavor.

Apple has always sandbagged guidance. The market had gotten used to it and never really punished the stock after earnings reports that handily beat quarterly earnings but issued forward quarter guidance below expectations. That all changed three months ago after Apple issued guidance that was overly conservative, even by its standards, and the stock got crushed.

Trading in the low 90s during Tuesday's pre-earnings trading session, investors expected more of the same. Apple's guidance had been for $8.0 billion in sales and about $1.00 of earnings. The company actually reported $7.9 billion and $1.26. Analysts were at $1.65 for the current quarter and many figured Apple would guide to $1.30 or $1.40. (Call Transcript)

Given the uncertain economic environment, coupled with last quarter's overly conservative guidance, I figured this quarter's guidance would be equally uninspiring and investors would get a sell-off in the stock, perhaps well into the 80s, which in my view would be a great entry point. As a result, I did not buy any Apple shares during Tuesday's weakness.

Apple guided this quarter to between $1.06 and $1.35 Tuesday night. Compared with current consensus of $1.65, this looked perfect for my thesis. Even if Apple beats its own guidance handily, there is little chance it will actually beat $1.65, so what would prompt the stock to rise?

Well, oddly the stock was up $8 in pre-market trading Wednesday morning to about $99 per share.
I guess the numbers could have been worse. Perhaps everyone who wanted to sell Apple has already done so.

Personally, I think a very conservative fair value estimate on Apple stock, in today's economy and market environment, is around $100 per share. I get there by taking 15 times net trailing operating earnings and adding in the company's huge $24.5 billion cash hoard. If the stock gives up yesterday's early gains, Apple bulls should take a hard look at the stock, in my view.

Full Disclosure: Peridot was long shares of Apple at the time of writing, but positions may change at any time.

Comments

[awcabot:]

Apple actually guided $7.8B(*) and delivered $7.9B, so it beat it's own guidance.

However I would like to know why the author thinks that 15x trailing earnings is a good price, when presumably he bought it at $118 in February, when it had a considerably higher P/E. Why was the high P/E ok then but not now? Are Apple's EpS growth prospects so reduced that at P/E of 15 is high? Is the author considering GAAP or non-GAAP earnings?

I personally think that Apple at worst will deliver no low growth (10%) for the next couple of quarters, and when this economic malaise subsides, we will find Apple growing a fourth leg to it's business model, in something we can not yet imagine.

* www.apple.com/pr/libra...

2008 Oct 23 07:10 AM

[Andy Zaky:]

Why don't you read this and then you might begin to understand why the stock might climb.

bullcross.blogspot.com...

2008 Oct 23 07:36 AM

[Turley Muller:]

The stock did get crushed - from 160-70 to below $100, that low guidance was priced in weeks ahead of the call. Guidance has been such a major focus the previous few quarters, that some investors didn't want to be long going into the call unless stock was way oversold and dirt cheap (which it was this time)

2008 Oct 23 08:34 AM

[Smartinv:]

I agree with the author. The Apple Bulls are too bullish and not realistic about lower earnings in the quarters to come.

2008 Oct 23 11:15 AM

[KenC:]

You say, "Personally, I think a very conservative fair value estimate on Apple stock, in today's economy and market environment, is around $100 per share. I get there by taking 15 times net trailing operating earnings and adding in the company's huge $24.5 billion cash hoard."

You should try using net trailing non-GAAP operating earnings to get a true picture of Apple, and then do your little calculation, and see where your price target ends up.

2008 Oct 23 03:36 PM