Apple's (AAPL) shifting product release cycle has created a high degree of investor uncertainty within the quarterly biased tradition of Wall Street. For a company that attracts more product release hype than any other in the history of planet earth, this shifting product release calendar has caused investors and analysts to be mislead regarding the true state of Apple's financial health. It's a phenomenon unique to Apple because no other company elicits the scope of product release volatility like Apple does. Especially in the most recent upgrade cycle to iPhone 5 in which Apple sold 47.8 million units in the holiday quarter, Apple has demonstrated a one-of-a-kind ability to generate product release hype that remains the envy of all its competition.
Unfortunately for investors, this recent round of hype has not translated into stock returns. The shifting of the product release calendar and its uncertain effect on year over year quarterly earnings analysis has trumped all other stock moving variables. It's become more important than a p/e ratio. It's more important than analyst upgrades or downgrades. It's more important than Verizon's (VZ) iPhone sales number. It's more important than being in tune with the hedge fund action that characterized all of those slingshot moves over the past three years. The hot new trade of 2013 is in sync with Apple's year over year calendar shifts. We like to call it calendar chaos.
On January 13, 2012 Apple launched the iPhone 4S in China and 21 additional countries. On March 9th the 4S launched at China Telecom (CHA). The iPad 3 launched in the United States and seven additional countries on March 16, 2012. On March 23rd, it launched in Europe, Mexico and Macau. The recently ended Q1 2013 didn't include any of these launch events because Tim Cook was able to push the international launches into Q4 2012 alongside an earlier than expected iPad refresh.
How will this calendar shift affect Apple's Q1 2013 earnings? Nobody outside of Apple's own management team has a clue. Last year in Q1, China accounted for a record $7.9 billion of Apple's revenue because of the 'mind-boggling' iPhone launches in conjunction with the Chinese New Year, how did Chinese sales hold up without a new product launch in Q1 2013? Nobody outside of Apple's management team has a clue. I hate to use this phrase but when you take away apples to apples year over year comparisons, you're left in the dark.
Analyst expectations are all over the place. Because nobody has a clue, investors are consumed with negative uncertainty. For the first time ever, the whisper number for Apple earnings on April 23rd is actually below analyst expectations. We're assuming this will be the ugliest quarterly report since 2003. As a result, the stock has sold off another $75 in the weeks leading up to it. Calendar uncertainty has left us in no man's land. The greatest company in the world now has a p/e less than Dell. What's going on?
Year over year quarterly earnings comparisons no longer provide an accurate indicator of Apple's health and yet Wall Street refuses to deviate from its time tested tradition. This simple disconnect has created a new paradigm for Apple stock action. The stock will flourish when the next quarter has a product launch advantage compared to its year over year counterpart and the stock will sell off when the next quarter has a product launch disadvantage compared to its year over year counterpart.
For those who are interested in an accurate view of Apple's health, analyze 12-month data rather than 3-month data. During calendar year 2012, Apple grew revenue by 28.7%, net income by 26.4% and iPhone unit sales by 45.9%. This growth expectation fits perfectly with today's Verizon data that showed a 25% year over year increase in iPhone sales. Apple appears to have settled into to a mature growth rate between 20%-30%. To put this in perspective, the earnings growth rate of the S&P 500 in Q4 2012 was 4.1% and the expected growth rate for 2013 is 3.2%. Google's core revenue growth rate in Q4 was 21%. Can Apple rally with 20%-30% growth? Of course it can. The problem is that quarterly data skewed by calendar chaos will mislead investors to the downside in a bad quarter and will mislead investors to the upside in a good quarter.
Apple's forward p/e ratio of 8 compares favorably to the S&P 500 p/e of 16.4. Apple's holds $146 in cash per share. An Economic Timing subscriber reminded me yesterday that if the market assigned the same valuation metrics to Apple that it does to Google (GOOG), Apple would be trading at $1,073 per share. If Google traded at Apple's valuation, GOOG would be at $293. With metrics like these, I think most rational market observers would agree that the Apple stock story is far from over. The product pipeline is rumored to include a lower priced iPhone, fingerprint iWallet functionality, iWatch, and iTV. Nevertheless, the falling knife of this sell off has become too much to handle for most individual investors. How are we supposed to navigate this volatility?
The answer is common sense. Here are three steps to follow:
Label each quarter compared to its year over year precedent. Each quarter will qualify with one of three labels. It's either an iLaunch advantage quarter, an iLaunch disadvantage quarter, or an organic quarter in which no new products are launched this year or last year. In an iLaunch advantage quarter you want to own Apple, in an iLaunch disadvantage quarter you don't want to own Apple, in an organic quarter the action can go either way.
Identify turning points. Obviously the new stock trend will not begin or end on the exact date of a quarter. The most typical turning point will be the quarterly earnings report. Q1 was labeled as an iLaunch Disadvantage quarter, therefore the stock is under pressure until the report on April 23rd. Q2, however, is an organic quarter unless Apple surprises us with a dividend/buyback announcement or a new product launch. Therefore the stock action in the aftermath of April 23rd should be much better than it was during the disadvantaged Q1.
Position your portfolio. Nothing influences sentiment as much as stock action. There's only a small group of investors out there who have the guts to stand up to the momentum crowd. Apple's calendar chaos trade requires you to stand up to sentiment overshoots. Just when everyone has thrown in the towel because Apple's quarterly earnings disadvantage mislead the masses, it will be time to shift strategies against the grain if Apple is headed towards an organic or advantageous quarter. We'll rely on technical indicators to protect our downside when investing against the grain but we should be willing to invest larger allocations in the hot quarters.
In conclusion, Apple's calendar shifts have increased the complexity of investing in Apple. Quarterly data no longer provides a reliable metric of the company's health. Getting in sync with this evolving paradigm is essential to making money in Apple. Buy and hold doesn't work. Currently our largest portfolio position is cash. Watching Apple sink below $400 a share when we have 80% of the portfolio in cash is not a bad thing when there's an organic quarter and possibly an iLaunch Advantage quarter right around the corner.
As a note... today was the first time since mid July 2006 that I heard a CNBC anchor use the term 'applesauce' in reference to Apple. The year 2006 was the only year that we served homemade applesauce at Thanksgiving dinner after coming off the best three month run of our careers. Maybe we should call this 'applesauce time'.
Three trading days left until Apple earnings.