It is my belief that shares of Apple (AAPL) should be bought into the upcoming earnings report at or below the $500 level for the following reasons:
- There seems to be a concentrated media effort to "downtalk" the stock. This fuels negative sentiment and will amplify the returns of a contrarian long position in the result of an earnings and/or guidance beat
- While long-term structural issues surround the firm's products as they further approach commodity status, in the near term, I see the opportunity for enthusiasm surrounding the expansion of the firm's products into international markets as an unequivocal positive
- Analyst estimates for the current quarter and the next quarter have come down significantly. Should Apple surprise to the upside in the current quarter, it could also take the opportunity to quit "sandbagging" its estimates and give a realistic, estimate-beating guidance.
- The firm may announce a dividend increase, which would attract new types of buyers to the security.
The Media Downtalking
Apple is a stock that quite a few investors - retail and institutional - are quite heavily involved with. Further, given that the high market capitalization of the security and the high individual share price of the stock, there is very likely a significant amount of leverage being deployed to purchase the shares. This is a partial explanation of the correlation of the volatility of the stock and the sentiment surrounding the stock.
Another point of interest is that many people - even those who do not know the first thing about a P/E ratio - who are long the stock. When sentiment is strong, these folks have the natural inclination to continue to buy, and when the iPad Mini is outselling the iPad, these people rush to the exits.
Should Apple "blow out" the quarter, beat estimates, and guide favorably, sentiment will turn incredibly positive and likely help fuel a clearly-defined up-trend for the quarter. Of course, the corresponding downside risk is that if Apple actually misses and/or guides terribly, then the media assault will continue and the stock will resume its downtrend.
There Is Still Near-Term Growth To Be Had
Apple will have a very difficult time selling extremely expensive high-end phones when cheaper Android phones - as well as the firm's own previous generation models - will be more than "good enough" for the majority of users. This is why I am long-term bearish on shares of the company. However, investors may be a little early to calling this trend, and should that be the case, a healthy mix could prove to be a significant near-term upside driver.
As Apple expands into new markets, the "allure" of the latest phone will likely be similar to that exhibited in the early days of the smartphone in the more developed countries. This will help Apple command a premium for its devices and its brand. Near- to mid-term growth from emerging/new markets should actually be quite healthy.
The Bar Has Been Lowered This Quarter
The bar has certainly been lowered for the quarter, as the analyst estimate trend over the last 90 days has clearly shown:
While it is unwise to worry about estimates for 2014 (really, this is a highly competitive business in which disruption happens, trends change, and so on), the interesting thing to note is how the estimates for the current quarter and the next quarter have come down significantly.
To put these numbers in perspective, the company is expected to see a slight Y/Y decline in EPS in the current quarter (4% decline) and in the next quarter see a <1% Y/Y decline in the upcoming quarter. Analysts still expect the current year to outperform last year, however.
On an earnings and/or guidance beat, these estimates will all skyrocket up and in turn lead to a higher share price.
Apple may announce a dividend increase, placating folks like me who want Apple to be less stingy if all they're going to do is stuff cash into T-Bonds. Now, there is talk that Apple is actually helping to fund a brand new semiconductor fab as a joint venture with Taiwan Semiconductor (TSM), and if this is the case, Apple's R&D and/or capex needs could skyrocket.
Further, as Apple's management will soon find out, designing microprocessors/systems-on-chip at a regular beat-rate is expensive. Expect Apple's R&D line to continue to increase Y/Y each quarter.
Nevertheless, Apple still is obscenely profitable and generates an immense amount of free-cash-flow. That $10/yr dividend is pretty paltry compared to $48+/share/year in earnings. Apple can afford more, and I expect as the share price continues to drop, the firm may consider a dividend increase to attract new types of retail and institutional buyers. In addition, by establishing itself as a dividend-growth firm, the volatility will be significantly mitigated going forward.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.