Introduction: I'd like to add my voice to the countless others who want to say something about Apple Inc. (NASDAQ:AAPL). Why might I have anything worthwhile to say about this over-discussed company and stock?
My AAPL background: Here are links to two representative blog posts I have written on the subject that may help to prove some bona fides on the subject.
1. Sept. 1, 2010: Gold 'n Apple (bullish on both: AAPL around $259).
2. August 20, 2012: Updating Old Coverage and Introducing a New Favorite Group of Stocks (Downgrade; AAPL $665)- from which I quote:
AAPL: I penned a bullish note pre-earnings. Sales and earnings disappointed, but leaks of upcoming product intros have spurred a massive rally. This has occurred on significant declines in current quarter and next fiscal year estimates from the analysts. AAPL fans are not deterred. 40% yoy increase in earnings estimates are expected from a number of members of an AAPL-oriented forum in which I participate, whereas analysts are looking for perhaps half that yoy gain. For the first time since I started blogging enthusiastically about AAPL in spring 2010 around $250/share, except for the period of uncertainty regarding SJ's illness/impending demise, I think that AAPL is a good but not great stock going forward-- though it is a great company. I'd like to see more fear and improving fundamentals to think it's a great stock prospectively, which are situations I see with several other companies that unlike AAPL are well off prior highs though along with Apple they have record sales and earnings.
In my role as a "super moderator" on the Apple/AAPL-oriented Braeburn Forum founded and led by Robert Leitao, I have posted daily on this stock and read thousands of posts by members, most of whom know much more about the relevant technology field than I. In any case, on that Forum, once the iPhone 5 ("iP5" for short) came out with nothing revolutionary and then the Apple Maps mess arose, I posted bearishly at AAPL $650 and above, urging members to consider that AAPL could be set for a large haircut.
That was then. Here are my thoughts in three parts.
I. Stock overview:
AAPL sentiment (the stock): Apple sentiment is mixed. Many bulls are unbowed. The latest data indicates few shorts are playing this decline, and neither have they been very active throughout this multi-month selloff. Put-call open interest ratios also do not indicate any aggressive shorting. But, the AAPL bulls I see on the Forum have now realized that the Company has hit a lull, has had some PR missteps, and is facing increased competitive challenges. More broadly, much of the media is now promoting an anti-AAPL message. This is the flip side of the adulation Apple was receiving throughout most of 2012.
Apple sentiment (the brand): In contrast to sentiment on the stock, public sentiment on the brand has continued to be stellar. Per Interbrand, Apple's brand value surged dramatically in 2012 to become the world's second "best" brand behind Coke (NYSE:KO). Fortune (CNN Money) has recently judged Apple to have repeated as the world's most admired company.
AAPL fundamentals: Apple is in the early, awkward stages of transitioning from a hypergrowth company to a value stock. Thus it trades at 10X trailing earnings now. If one were to back out the distributable cash, one might get to 8-9X. But to do so would be to leave the stock with almost no tangible book value. Meanwhile, the quarterly and yearly prospective growth rates are merely guesses. Apple largely created the modern computer-mobility market and thus has held on to very high margins. The latest Android operating systems (Ice Cream Sandwich and Jelly Bean) have largely caught up to Apple's latest iOS releases in their ability to satisfy power users of smartphones. And, the iPhone's elegant hardware is of diminished importance when it needs to be largely covered by purchase of a protective case. Meanwhile, increasingly, a tablet is a tablet.
AAPL has few natural buyers now: Few long-time AAPL shareholders are not buying now, I suspect. They're either holding or have sold, waiting for operations to turn around. Momentum players have no reason to buy. Value buyers recognize that with the examples of Nokia (NYSE:NOK) and BlackBerry (NASDAQ:BBRY) as recent examples, Apple's businesses operate in the wrong parts of the economy to be suitable for serious value buyers. And growth investors have no growth to point to as of now.
Also, Steve Jobs was irreplaceable. His return to Apple had to be the greatest second act in American business. Tim Cook should in fairness not be judged yet, but he's no Steve Jobs.
Summary of the above: The lack of many short-sellers and naked put buyers have helped allow the stock to crater from $705 to trade around 12-month lows around $440-450. The media is now talking up the new BlackBerry smartphones, and Google (NASDAQ:GOOG) is getting wildly favorable press-- even though the Android platform has numerous challenges.
The message of the stock market suggests that AAPL, the stock, is in trouble. But this is a much stronger, more diversified company than the one that forced Steve Jobs out in the 1980s.
II. Important positives:
A. The great Apple brand name is barely affected by the consolidation in the stock, and the company has stronger finances than almost any government. The intangible value of being the #2 brand in the world, and the most admired company, is gigantic. How much is this intangible worth? How quickly might it lose value? These are questions that can only be estimated. Clearly, though, today's value in the famous Apple logo, as it were, is vast.
Between cash in the bank and the immense goodwill associated with Apple, there is a floor under the stock. Where that it is not known, but it has to be well above a reasonable value of cash, which is, say, $100/share given appropriate discounts to stated cash and marketable securities.
B. Apple operates in secular growth areas that it essentially created, ranging from the iDevice lines to Macs. Its unremitting focus on quality continues to satisfy countless consumers. The iPad is an international phenomenon and is finding broad acceptance in many business and governmental spheres. While Apple's "walled garden" may eventually go the way of AOL's, the situations are not comparabie.
C. Apple's competitors are trying hard to emulate Apple's unified hardware-software approach. Apple has the desired paradigm that the others are struggling to attain. Microsoft (NASDAQ:MSFT) is slow out of the gate with its Surface products. Google (GOOG) paid a vast amount of money for Motorola Mobility and has nothing much to show for it. Samsung is trying to add its own software (bada, Tizen) to its own hardware, but is primarily locked into Android. Numerous Chinese and other Asian low-cost smartphone makers use their own versions of Android, as does Amazon (NASDAQ:AMZN). It is unclear if Google gets much benefits from these companies. In other words, smartphone (and tablet) competition is fragmented. Apple has a structural advantage in smartphones and tablets.
D. Apple retains cash cows in the iPod and Mac lines; Macs are gaining on a dispirited group of Windows PC makers.
E. As the #1 player in its space, Apple gets to see almost all new technologies first. This is a major advantage.
F. Controlling so much retail space allows Apple, if desired or necessary, to effectively market related products from other companies, including more major ones than the small accessories it now markets. In addition, down the road, Apple could expand its retail operations horizontally. One example is that if desired, it could sell non-Samsung TVs. Apple could expand more broadly as a retailer down the road, if it wished.
III. Important negatives: Almost all of these could not have been known when AAPL briefly traded around its current $441 price the morning after its blowout December 2011 quarter was announced in January 2012. The list of positives has not grown much, but the list of negatives has grown.
A. Tim Cook's abilities are being questioned broadly.
B. There is no head of retail (other than Tim Cook), and Cook's hiring and effusive praise of John Browett as head of retail followed by a quick firing speaks poorly for his judgment. Did I mention that even though Apple vetted so many people while searching for a head of retail, there is still no person selected?
C. The retail store experience would benefit from less product placement in discount big box stores and more from experimentation with small "feeder" Apple stores near larger central stores in a hub and spoke manner. The retail experience at Apple has not evolved much in years.
D. Apple's China effort has been poor. The retail store expansion is years behind schedule. The iPad trademark issue was embarrassing.
E. Apple is beginning to fall behind in smartphones. It ignored the large smartphone/small phablet category. The many fans of Swype, so popular on Android phones, cannot even think of switching to Apple. Google Maps finally made it back to the iP5, but it is better as the native default app on Android than as a downloadable app on the iPhone.
F. Siri has not evolved much. Why can't we talk to our Macs yet and tell them to go to SeekingAlpha.com?
G. Execution getting the latest Macs and other products into the retail channel has been poor.
H. There is no clarity on the pipeline.
I. The board lacks the "vision thing".
J. Apple is arguably back to the 1990s. Low-cost clones are taking sales from Apple. It refused to license out iOS when it stood alone as a modern smartphone OS; this might have stopped Android dead in its tracks. Apple also refuses to compete the way Intel (NASDAQ:INTC) competed with AMD (NYSE:AMD) years ago. Intel launched Celeron, thus not diluting the premium "Intel inside" brand name, but preventing AMD from controlling the low end of the market. Why couldn't Apple do the same in smartphones and tablets? Choose a name, give the low-cost device most of the capabilities of the premium iDevice's latest OS, and bring more and more people into the "ecosystem". MacDailyNews zealots aside, one phone cannot rule them all. Apple continues to sell the iPhone 4. It is nearly three years old. Give me a break.
There's no point in going on. There are many negatives.
IV. Where should AAPL trade?: The great and frustrating thing about the markets is, you have to stick around a long time to find out. Years later you still may not know the answer very well. We do not even know if any of the cash and marketable securities on Apple's balance sheet will accrue to shareholders. The company could make a giant acquisition which could end badly. It could engage in a massive buyback, and if you are a non-selling AAPL shareholder, that money did not help you directly. If the stock sinks anyway, you should have sold, but you did not.
A stock is worth its future cash flows to shareholders. A 2.4% dividend yield, even if it grows at 7% a year (no guarantees) for 10 years, does not come close to returning a shareholder's investment. So, absent a (say) dividend payout of 20% of market cap, it could be many, many years before anyone can truly know what AAPL shares "should" be trading at today.
Thus we are left to guess. Will Apple disrupt TV after all and also introduce a must-have new capability to the iPhone and iPad, leading the stock to $1111 after all? Or will it play it safe and milk the cash flow? Or worse?
Before summing up, I offer this analogy that avoids extremes. The post-2009 peak of global stock markets and of many cyclical US stocks came in the spring of 2011. One can look at other great, established brands with limited competition (unlike Apple): Caterpillar (NYSE:CAT) and Deere (NYSE:DE) come to mind. These and other dominant companies in their field such as Helmerich & Payne (NYSE:HP) traded for long periods at 10X trailing earnings after peaking in 2011, even though operations were doing fine. Mr. Market was sniffing out peak earnings of cyclical companies, that's all.
Maybe it simply is AAPL's turn to act like the shares of those great companies. Apple could easily dump enough cash out to shareholders to effectively be trading today at 9X trailing earnings, or less. At today's interest rates, that's an attractive, very high implied earnings yield of 11% or more. One could argue that this is superior to a fixed-rate low-quality (junk) bond yielding 6% that has interest rate risk and risk of return of less than 100% of one's principal, even including interest payments.
V. Conclusion: AAPL is finally reacting to the proliferation of negatives that momentum traders were ignoring late last summer and into the fall. The value of Apple's distributable cash plus its top-of-the-heap brand image account for an immeasurable but very large percentage of its market capitalization. As a stock, it competes with other, "safer" companies such as Procter & Gamble (NYSE:PG) with much higher P/Es but limited growth potential. Apple, however, helped to create the PC market and essentially created the modern smartphone and tablet markets. These, in aggregate, are secular growth markets. And of course, who knows what disruptive innovation in a new product or market, or important upgrade to existing products, the "Crazy Ones" in Cupertino have coming soon? This upside optionality is not going away any time soon.
A. Short term thoughts: Thus my bias is that the massive underperformance of AAPL versus the average stock since last fall may finally be due to reverse. I will speculate, and this is just a wild guess, that the stock is near an important intermediate-term capitulation. I will guess that smart money will like the risk-reward at a lower price given the many positives and the run-ups that many other share prices have had.
It may be time for other, risk-on assets to follow AAPL to the downside and for AAPL to begin to stabilize; or for AAPL to play catch-up if the stock market stabilizes here and moves higher.
B: Long term thoughts: The negatives are real. Absent a major new product intro, the issues with management and vicious global competition cannot be settled simply with a "beat" for a quarter or two-though doing so would help! I will humbly toss out the guess that AAPL frustrates both the bears and the bulls and settles into a trading range. Very broadly, this could be $380 at the low, which was the trading low after disappointing September 2011 earnings, and $590 or even $635 on the high. $590 was the rebound high in late November, and $635 was roughly the April 2012 closing high.
A tighter range where most of the trading might occur in the above scenario is $410-$540.
Everyone reading this understands all the thoughts presented herein that are not historical fact are either my personal opinions or my current guesses. Thus they are not investment advice. Nonetheless, I've gone public enough times on AAPL in blog posts and on the Forum with enough good luck in my guesses to hope that perhaps this article will assist AAPL traders and investors in evaluating this endlessly interesting company and its shares.