A Good Time to Buy Apple 35 comments
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Recent headlines have not looked stellar for the computer and electronics icon. From the health of Apple’s CEO, Steve Jobs, to a $22.5 million settlement to compensate buyers of the first generation iPod Nano on January 23, Apple has been in the limelight for all the wrong reasons. However, with excellent products and multiple new innovations in the works, Apple (AAPL) is poised to pop once investors regain confidence.
The Health of an Icon
One of the most astonishing developments has been the SEC investigation over a letter sent out by Apple on January 5th pertaining to Steve Jobs’ health. In the letter, Jobs stated his decline in weight was due to a hormone imbalance and that he was well enough to remain Chief Executive. The stock rose 4.2 % with this news. A little over a week later, however, Jobs released another statement reversing his previous one by saying his health problems were more complicated than originally thought and that he would need to take a medical leave until the end of June. Shares fell 7% in after hours trading due to the news. The SEC states that it wants to make sure the public wasn’t misled. Even with Jobs gone for a few months, there is no reason why the innovation which drives this company will slow down.
Strength through the Recession, and a Fast Recovery
Many might believe that tough economic times would cause a steep decline in demand for high end electronics such as the iPod and iPhone. On January 21, Apple released its first quarter results surprising investors with 1.9% net income growth largely on iPod and notebook sales. Total computer sales were up 9% year-over-year, and iPod sales rose by 3% even when Wall Street had predicted a decline of at least 5%. The Wall Street Journal also reported that Apple sold four times as many iPhones than Research in Motion (RIMM) sold Blackberry Storms in the fourth quarter of 2008. Apple is forecasting a slightly less prosperous second quarter, but additional product innovations should continue company growth. Apple was one of the quickest stocks to fall during the first signs of the recession, and I believe it will be one of the quickest to recover once the economy starts its recovery.
New Products
A host of new products have recently been introduced at Apple, and many more are in the works. Apple continues to tout its new iLife ‘09 software suite and just today began offering individual upgrades to itunes songs to convert them from 128 kbps to 256 kbps AAC encoding to improve quality and remove the DRM protection from tracks. Apple is also reportedly planning a higher end gaming section of its Apple store to sell higher quality games for around $10-$20. Even a 3G enabled Macbook notebook computer is rumored.
As Dell (DELL) only recently announced plans to enter the cellular phone business, Apple is poised to continue its growth in the industry by introducing an updated iPhone. Rumors abound on the internet that report the next generation iPhone will possibly involve a more significant redesign than the iPhone 3G was to the original iPhone.
Possibly the most important new introduction this year will be the updated Mac Mini which has been sold unchanged for over a year and a half. The importance of this lies in the changing PC market where consumers are shifting to lower priced Windows based PCs due to the economic downturn. According to NPD Group, Apple computer sales are losing market share to PCs. I believe this is almost entirely due to the much higher prices Apple demands for its computers. This new Mac Mini will be a viable option to computer shoppers trying to save money through the recession.
Over the past month, Apple has hit a few bumps in the road which have negatively affected its stock price. Its price has also dipped around 50% mainly due to the economic downturn and the more volatile nature of the technology sector. Like many stocks in this sector though, Apple is currently trading at an incredibly low P/E ratio of 17.49x even though it was trading around 35x about a year ago. Unlike many of its competitors, Apple’s success seems to be contingent mainly on its innovation and design. They do not compete heavily with price, like competitors such as the other computer manufacturers. At a current price of $87 per share, Apple is approaching its 52 week low and would even be a good buy in a channel trading strategy. Any way you put it, Apple will perform very well through 2009.
- Jonathan Devansky
Disclosure: The author is long AAPL.
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On Mar 02 01:27 PM nyoneway wrote:
> Unlesss you believe Apple will grow at least 20% a year in the forseeable
> future, it's current P/E of 17.5 vs the rest of the market looks
> expensive.
>
> Comparatively, Microsoft who is arguably Apples biggest competitor
> is currently trading with a PE of 8.52.
On Mar 02 04:43 PM EMS wrote:
> I think AAPL is great; products and management are world beaters.
> But you cannot escape the fact that few will be buying any products
> this year or next, unless they are absolutely necessary. This means
> that people will defer replacement of PC, Phone and laptops. People
> reach a point where they do not need any more itunes, and the ipods
> are pretty durable. You guys should search for value elsewhere, and
> back up the truck on it at 50 $. It will get there, I am telling
> you.
"The iPod line is nearing its tipping point in terms of market relevance with the rise of the all-in-one smartphone."
But actually owners of iPods are on an upgrade path to the iPhone, because it's the only smartphone on which they can play all the DRM'd music they've bought from Apple.
"It has failures that sit and stagnate on the technology side, like the AppleTV."
This may turn around if they play their cards right, according to various online speculations.
"Revenues from its international sales are going to plummet."
Unless they seize the nettle and license their OS to box-makers in the 2nd and 3rd world.
"Apple needs to adjust its model line and price structures to weather a massive economic downturn. This company is not immune to overall conditions. They are behind the general curve with a large part of that intransigence embedded in the egos of some of its management whose vision of the customer base are not matched by reality. ... Any signs of changing behaviour? No. None. This is a company whose past behaviour has choked its growth. It can happen again."
I agree. And yet this is not an intractable issue. The company is not boxed in by outside factors beyond its control. It could think different. Therefore, there is massive upside potential in the stock. A good sign of fresh thinking would be if it prices its re-do of the Mac Mini (due in a few months) aggressively and upgrades its features, even though this would cut into iMac sales.
On Mar 02 01:24 PM crowdofcheerleaders wrote:
> to an APPL lover, is there ever a time not to buy? man i'm getting
> tired of you people.
On Mar 02 01:27 PM nyoneway wrote:
> Unlesss you believe Apple will grow at least 20% a year in the forseeable
> future, it's current P/E of 17.5 vs the rest of the market looks
> expensive.
>
> Comparatively, Microsoft who is arguably Apples biggest competitor
> is currently trading with a PE of 8.52.
On Mar 02 02:09 PM Michael_Cohen wrote:
> Right, it's recession proof because people are going to pay double
> for a Mac laptop than a PC even though the Mac isn't any better...it's
> just 'cool.'
>
> Also, everyone and their dog has an iPhone already. Given the economic
> climate, people are going to hold onto their cell phones longer and
> only buy a new one if they really need one.
>
> "Apple is currently trading at an incredibly low P/E ratio of 17.49x"
> LOL. Man, what a bubble company.
>
>
> Aristophanes wrote:
> "The iPod line is nearing its tipping point in terms of market relevance
> with the rise of the all-in-one smartphone."
>
> But actually owners of iPods are on an upgrade path to the iPhone,
> because it's the only smartphone on which they can play all the DRM'd
> music they've bought from Apple.
No. They can un-DRM and get a far cheaper package from other providers at better operational value.
Historically, expensive cellphone plans have been amongst the first casualties in a downturn, and they take along, long time to bounce back. This is not a time to be the premium price brand.
> "It has failures that sit and stagnate on the technology side, like
> the AppleTV."
>
> This may turn around if they play their cards right, according to
> various online speculations.
"Various online speculations"??? Notoriously unreliable.
The demand for flat-panel TV's is in steep decline. The market for all non-basic cable services is in freefall right now. Speculate all you want, but the consumer base for new vectors of transmission at Apple's typical premium pricing are gone.
> "Revenues from its international sales are going to plummet."
>
> Unless they seize the nettle and license their OS to box-makers in
> the 2nd and 3rd world.
Absolutely not going to happen. Apple is all about margin and there is no way any 3rd part, developing world source could keep a grey market Apple system at bay.
And there is no 2nd world anymore. It fell with the Berlin Wall.
> "Apple needs to adjust its model line and price structures to weather
> a massive economic downturn. This company is not immune to overall
> conditions. They are behind the general curve with a large part of
> that intransigence embedded in the egos of some of its management
> whose vision of the customer base are not matched by reality. ...
> Any signs of changing behaviour? No. None. This is a company whose
> past behaviour has choked its growth. It can happen again."
>
> I agree. And yet this is not an intractable issue. The company is
> not boxed in by outside factors beyond its control. It could think
> different. Therefore, there is massive upside potential in the stock.
> A good sign of fresh thinking would be if it prices its re-do of
> the Mac Mini (due in a few months) aggressively and upgrades its
> features, even though this would cut into iMac sales.
Apple tends to box itself in when reacting to external forces. It is extremely resistant to external pressure, more as a point of pride than practicality. Its margins are tenuously based on premium, bundled pricing (the iMac).
When consumers start to price parse—as they always do during a downturn—Apple always struggles to redefine itself. Apple can be very flexible and speedy in remodelling its product line, but that's not the same as price cutting to keep/gain market share and gross revenues on a unit-by-unit basis. This downturn is so severe that it implicates Apple's entire business model as disposable income dries up. Premium pricing on base consumer goods is not where you want to be right now. They need a low end desktop with no screen, a much cheaper iPhone plan, and some price cutting, using that cash hoard to keep the gross sales where they need to be. The education market is going to rapidly drop Apple unless price cuts are coming. I am not talking about a $100 per iMac cut; I am talking about a 25% cut to match what is available from Dell. My sources say Apple is going to struggle enormously to maintain some very large education accounts without major concessions on price.
What's a real differentiator, something we can put a finger on? Product quality and innovation. There's no saying that those'll factor properly into share price in the short run, either. But long run, there's nothing better than "products that knock the competition into the dust" as an indicator of where to place your money.
There's no sense in listening to the clueless who say things like "people are going to pay double for a Mac laptop than a PC even though the Mac isn't any better...it's just 'cool.'" No no no. People never bought any computer because it's "cool", and there's no indication that they're about to start. People buy for performance and value, and that's why the PC and phone markets are moving to Apple.
Short term? Who knows. Long term? AAPL.
There are always people who have $$$ to spend, no matter how bad the economy. People won't buy 'expensive cell phones'..they'll make do with what they have...but they WILL move on to a smartphone, esp. the iPhone, which gives them email, web, apps, etc. People want to feel connected to family and friends...we've gotten use to being able to do that. In bad times, people will need that feeling of being close, more than ever.
Apple stores are in upscale areas...for a reason. Even the malls still have traffic...it's just that a lot of the OTHER stores are empty. I shop King of Prussia and that store is always busy...and people are buying.
Long APPL, happily.
Everyone forgets that Apple has come this far in the recession without making one single concession to margins.
It has HUGE scope to do reduce prices - should it need to. My bet is it won't because it won't need to.
In a downturn people are more careful with their money, and often don't go for cheap and wasteful.
Apple with it's deferred earnings insulating it, and products leaving competitors in the dust, are a gift horse at current prices.
The "Experts" have consistently said Apple would fall first.
They have consistently been wrong.
Instead, Apple has consistently been at the top of earnings, cash, innovation, sales, loyal customers, brand, admiration, customer satisfaction, etc. etc.
The stock is actually at a P/E of 5 - yes FIVE. Using such a metric, this is a super bargain.
Apple will continue to grow that cash, even though they are spending it on acquisitions, R&D, and new stores. Yes, Apple continues to build highly successful and profitable retail segments. They are hiring while others are firing.
Looking at history, the companies that came out on top after economic downturns, and indeed, The Great Depression, were those that used it as an opportunity to invest. This is what Apple is doing, this is what I am doing.
In a down economy, people are more acutely aware of VALUE over price. This is why Apple is doing so well. Whether you agree or not, people are voting with their pocket books.
Apple's stock has been the most abused of the lot, when you actually look at reality. Why? Investors are taking profits where ever they can and converting to cash. That means, companies that are doing very well fundamentally, are being hit the hardest in the stock price. Unfair? Perhaps. But these will be the companies that have the biggest pop, once investors return.
Yes, there is some media manipulation going on too. There is more money to be made these days in put options, and the companies that are targeted are the good ones like Apple.
Apple is not Microsoft, it is not Rim, it is not Palm, it is not Dell, it is not Intel, it is not IBM, it is not... you get it. Apple is compared to all of these companies, yet it is not even close to any of them. Apple is not a one trick pony, but rather has multiple business legs... and they are firing on all barrels.
How do we get investors back into the game? No one rebuilds a burning city until all the fires are put out and the smoke has cleared. So far, Apple has been made of Asbestos... I believe, investment funds are beginning to see this. During the summer, you will see Apple shares pop substantially, because of this. Individual investors need to heed the old adage, "buy low, sell high". So far, from what I've seen, they haven't done very well with this.
Myself, I'm long Apple, and buying whenever it drops.
It is a tough market, and Apple, though great, is not immune.
I would buy a netbook right now but.......they don't have one.
""Various online speculations"??? Notoriously unreliable.
Not good enough? Then take a look at this:
"Piper Jaffray’s Munster: Apple TV to sell 6.6 million units, get DVR capability in 2009
macdailynews.com/index.../
"Philip Elmer-DeWitt has summed it up via bullet points for Fortune:
"• While Apple downplays the possibility, we expect the company to design a connected television over the next two years (launching in 2011).
"• Separately, and in line with published reports, we expect updates to the Apple TV hardware with TV DVR functionality in the next nine months.
"• We are modeling for Apple to sell 6.6m Apple TVs in CY09, which assumes a continuation of the y/y growth rate of 3x seen in the Dec-08 quarter.
"• If Apple introduces new hardware in CY09 our estimates could be conservative; every 1m units sold adds $0.03 to our CY09 EPS estimate."
Here are two other threads on the potential of Apple TV:
"BusinessWeek: Tripling unit sales show Apple TV is more than just a hobby":
macdailynews.com/index.../
"NY Post: Apple TV + Boxee = the future of television":
macdailynews.com/index.../
======================...
Aristophenes continued:
"The demand for flat-panel TV's is in steep decline. The market for all non-basic cable services is in freefall right now. Speculate all you want, but the consumer base for new vectors of transmission at Apple's typical premium pricing are gone"
That's way too know-it-all. Many people have been propounding similarly on SA and elsewhere for months that Apple was going to fall off a cliff due to its premium pricing. If that was going to happen, there'd have been stronger signs of it in the Dec. quarter results. Instead, Apple's sales and profits have held up, unlike those of most of its competitors, contrary to critics' theory.
We'll have a better grasp of the sustainability of Apple's premium pricing when we see how Apple's new desktop line fares in the coming month. It's still priced at the old levels, just with more bang for the buck, following its standard practice. Here are links to its announcements:
Pro: macdailynews.com/index.../
iMac & Mini: macdailynews.com/index.../
Apple could easily drop its prices without hurting its bottom line if it really needed to do so. So I don't see how anyone could think that Apple is threatened more than its rivals in this depressionary environment. It's actually less threatened, because of its room to maneuver on prices. (I do agree however that it would be wiser to sell for lower prices and attain a larger market share of future upgraders.)
Aristophanes responded:
"Absolutely not going to happen. Apple is all about margin and there is no way any 3rd part, developing world source could keep a grey market Apple system at bay."
First, people should learn, especially when dealing with Apple, to "never say never." It's had a habit of breaking its rules from time to time. I remember reading a list (which I've mostly forgotten) of over half a dozen practices Apple fans were sure Apple would never change--but it did.
Second, I should have specified that I meant that this licensing would be for sale only within the manufacturer's own country, and that Apple would closely monitor distribution to ensure that this was adhered to. This would be lots of free money for Apple, and would do a favor to poor foreigners who couldn't afford Apple-made hardware. It would allow Apple to charge what the traffic will bear, just as American drug manufacturers do in their pricing abroad.
+++++++++
Aristophanes continued:
"And there is no 2nd world anymore. It fell with the Berlin Wall."
I was aware of that. I used "second world" as a shorthand for the geographical area encompassing China, the XSSR, and New Europe.
I dunno, some people just might do it anyway (while the Mastercard holds up, at least):
stuffwhitepeoplelike.c.../
stuffwhitepeoplelike.c.../
On Mar 02 02:09 PM Michael_Cohen wrote:
> Right, it's recession proof because people are going to pay double
> for a Mac laptop than a PC even though the Mac isn't any better...it's
> just 'cool.'
>
> Also, everyone and their dog has an iPhone already. Given the economic
> climate, people are going to hold onto their cell phones longer and
> only buy a new one if they really need one.
>
> "Apple is currently trading at an incredibly low P/E ratio of 17.49x"
> LOL. Man, what a bubble company.
>
>
Aristophanes responded:
"No. They can un-DRM and get a far cheaper package from other providers at better operational value."
But they have to PAY to un-DRM them. And they can't pick-and-choose which songs to un-DRM (as of the last report I read): it's an all-or-nothing deal. Maybe it's cheaper overall to under-DRM, but iPod users are still slightly locked in, even if they can jump over the fence.
Aristophanes continued:
"Historically, expensive cellphone plans have been amongst the first casualties in a downturn, and they take along, long time to bounce back. This is not a time to be the premium price brand."
Last quarter AT&T reported that its iPhone customers were not dropping out, but instead were more sticky and were spending more on their plans than had been the norm. So there is no "first casualty" effect yet. In addition, if a person wants an awesome multi-touch smartphone, the iPhone is well above the rest, for now. So Apple isn't selling the same thing for a higher price. Thus, it’s not terribly vulnerable.
There was also an interesting marketing-research firm's findings about three months ago that pointed out, to a good bit of comment, that iPhone growth was strongest in the low-income sector of the market. The report stated that the iPhone was actually cost-effective for that segment because it could do the job of a number of other gadgets, such as a computer (an iPhone can surf the web and do e-mail), a camera, a music player, a digital recorder, a game-player, etc. (Goodbye landline phone—a considerable savings.)
Apple's core (ha ha) markets:
1) Consumers—Massive decline in real household wealth means far less purchasing power overall. This has always translated into poor sales for premium priced brands. Always. There has never been an exception in any downturn. Never. Apple explicitly states it is a premium brand. One market survey in New York I read projected a decline of as much as 30% traffic at Apple Stores in the city, based on comparison to other premium brand stores that target the same demographic. Apple is no exception to macro trends in the broader economy.
2) Business—For Apple, can pretty much be summed up as advertising, media and news. All are in deep, deep trouble. After financials and housing this is the worst hit sector of the economy. It also generates about 40% of Apple's margins because this is the Pro line market. Advertising agencies are seeing budgets slashed by as much as 60% with no end in sight. Apple's bottom line has not reflected that in 2009 most of major customers for the big iron will simply not be making capital purchases. I know marketing agencies who have seen no new work since September and who bought new machines every year. Not this year.
3) Institutions—In case no one has noticed, this sector accounts for about 15% of all Apple sales, especially of iMacs and MacBooks. It is hard to ignore that local tax revenues are plummeting and school systems are dramatically slashing budgets (like California). My education sources (I used to work in education sales, selling Macs) tell me orders are expected to be off almost 50%from last year. Remember: the 2008 results reflect 2007 spending decisions. A net decline in units sold is already being factored into contracts. Within 3 months institution orders for Apple products will be down by at least 30% and accelerating. This will not reverse itself until state finances improve.
These are realities that are unavoidable. Simply put gross sales must decline in both remittances and units. This means that Apple has product oversupply. All the new, clever and cute products Apple releases cannot undo the market fundamentals that high prices inhibit sales in a severe recession, and certain buying segments simply stop buying. The vast bulk of Apple's gross revenues come from its Mac line. Consumers simply do not have the disposable income to make up those lost revenue streams.
Apple does not have a major presence in corporate and small business sales where tax advantages for depreciation can keep the capital purchases chugging along. Where Apple has been traditionally strong is precisely where the market is in the worst shape. This is not good for both the short and long term.
In terms of the stock value, has the market future priced Apple? No. There is always a a delay on capital asset purchasing and so far the P/E has not reflected those declines. They will. So far Apple's stock decline has simply matched the market's average. Its cash on hand, slick inventory system and strong management are buffers they will need to use, but the inevitable conclusion is Apple is going to see a drop in unit sales and therefore revenue. 2009 is going to be a very difficult year for Apple.
The stock will face significant downward pressure in the coming months. I am shorting it (when/if Jobs comes back in June, it will rally; if not it will tank even more).
"Historically, expensive cellphone plans have been amongst the first casualties in a downturn, and they take along, long time to bounce back. This is not a time to be the premium price brand."
Historic data on cellphone plans? Your comment is completely anecdotal. The fundamentals of cellphone usage have completely changed in the past 10 years. While perhaps a smart phone is discretionary, having a cellphone is not a luxury anymore. You are trying to make an apples to apples comparison (with no supporting data) for a product that in my opinion is going through a revolutionary change. First casualty to go? You are dealing with a new generation that would drop their landline service before cellphone. That will be the first to go. I think looking at cable tv retention in the previous downturn provides better insight.