Taking Another Bite of Apple

I once bought Apple (AAPL) on a pullback just before it reported earnings. It was a stupid move, but it paid off because nobody had anticipated just how many iPods Apple was selling.

One of our rules for evaluating growth stocks is that the leaders of a previous bull market are seldom the leaders of the next one. In fact, the odds are about four-to-one against it.

But Apple is apparently beating those odds. The stock, which peaked at 203 during the last days of 2007 and completed a kind of double top at 192 about a year ago (with a dip to 115 in between), is now coming off a new base after bottoming at 78 in January.

It’s not just the run from 78 to 138 that makes AAPL attractive. And it’s not just the boost the stock will get when (and if) Steve Jobs reports for duty again.

No, it’s the flood of sales for the iPhone and all the apps for the iPhone flowing together with the billions of songs purchased from iTunes and the still substantial sales of iMacs and PowerBooks to make a river of revenue. So far, analysts haven’t been able to get their minds around the money you can make by offering consumers “insanely great” products. And we’re not even talking about the possibility of getting the iPhone into the hands of Chinese consumers.

Apple’s revenues during the fourth quarter of 2008–the lowest point of a very low period for the market–were still up 6%, which improved to 9% in Q1. Earnings were up 1% in Q4 and have improved to a respectable 15% in Q1. AAPL isn’t cheap (P/E ratio of 23) and isn’t unknown (857 institutional supporters). But it’s pretty much broken every rule in the book, and if it wants to be a leader in this new bull market, I’m not going to say no to it.

Comments

[Roger Knights:]

The P/E ratio isn't as high as 23 if you deduct its cash hoard from its price and increment its earnings by the deferred revenue from the iPhone.

May 11 10:32 AM

[Techtrader10:]

Just a guess, but it would seem to me that Mr. Goodwin is long Apple stock. With comments like “insanely great' products" and "And we’re not even talking about the possibility of getting the iPhone into the hands of Chinese consumers", its hard to feel that he is objective in his evaluations (not many 3G networks in the rice fields of China). Since I day trade Apple (long twice, short once so far today) more than position trade the stock, I don't feel comments like Mr. Goodwin's affect my trading, but it does make me feel uncomfortable that novice investors see his comments and don't realize his comments are self serving.

May 11 11:02 AM

[Murphy Mac:]

I've accumulated aapl everywhere from $30 up to $120. If it gets back to $170 or so I'd be tempted to cash out - with a plan to get back in on the next big pullback.

Is aapl one of those stocks you hold forever? If I saw them making serious enterprise plans I'd say yes. I don't see that happening, and it makes me wonder how aapl can move past $200.

Note for Paul Goodwin: Apple hasn't made a Powerbook since 2006.

May 11 11:02 AM

[reagan:]

Smart thinking. Apple will hit 200 sometime this calendar year & probably 300 in th next 18 months. One of the top 5 companies in the world & continuing to sell a ton during these economic challenging times. Simply amazing!

May 11 11:05 AM

[FreeRange:]

Apple needs to speed up its introduction of the iPhone in China. China is just now rolling out 3G for the first time as we speak, and only in major markets to start. Many of the iphones, if not most (estimated at 800,000 here in China) are first generation phones as 3G has not been an issue since there hasn't been a 3G network. I just moved here and find that current iPhone owners are looking to upgrade to 3G but there is a good possibility that they are not going to stick with the iPhone as they are too hard to get in China, especially the 3G version because of contract obligations to buy one. Lets get this deal done!

May 11 11:12 AM

[Anthony B:]

I think Roger won't be the only one to catch this. Seekingalpha has been full of articles bringing attention to the Non-GAAP P/E, and $30 billion in cash on the balance sheet. Most notably by Andy Zaky.

On May 11 10:32 AM Roger Knights wrote:

> The P/E ratio isn't as high as 23 if you deduct its cash hoard from
> its price and increment its earnings by the deferred revenue from
> the iPhone.

May 11 11:18 AM

[Bradmol:]

Well diversified, lots of cash, a leader in mobile smart phones, mp3 players, computers and software. What else can any investor ask for. Things change quickly in these times and industry. Remember 2 years ago, iphone never existed. But their very first attempt at any phone blew away market leaders like Nokia and Motorola. Who would ever have thought.

May 11 11:19 AM

[Constable Odo:]

I didn't think all the millions of songs sold and the billion or so downloads means very much in terms of direct revenue. iTMS is still considered merely a breakeven venture. I suppose if Apple can use iTMS to continue to directly drive sales for iPods and iPhones and somewhat for Macs that is somewhat helpful. However, RIM is undercutting iPhone sales and continues to gain market share while the various netbook companies flooding the market are slowing Mac notebook sales.

I doubt if the iPhone being introduced to China is going to grab huge amounts of sales. Sales are likely to be relatively slow compared to U.S. sales.

I'd like Apple to focus on getting the iPhone and Macs into the enterprise now that Windows Vista has alienated corporate upgraders. Apple hasn't done anything against RIM in the corporate sector since IT managers insist the iPhone isn't secure enough and can't be remotely managed easily in large numbers.

Apple will continue to do OK and the share price will slowly rise, but investors need to be convinced that Apple is more than just some overpriced, high-tech toy company. This gaming ability that Apple is pushing isn't helping Apple's image at all for pulling in serious investors.

I'm long Apple since 2004 and I want to see Apple make a name for itself in the corporate sector and not just some.. company that sells games for people on the run. Apple doesn't have a single product in the enterprise that can generate continuous sales and that's not good at all.

May 11 11:53 AM

[Tom B:]

Apple controls around 3% of the global PC market. With Win7 looking like a minor upgrade from Vista, it seems unlikely we'll see anything from Redmond that could be a threat to Apple's growth anytime soon, if ever. Thus; Apple has HUGE upside.

May 11 12:14 PM

[SiliconVall...:]

High tech toy company whose products are being used by our troops for their missions while patrolling in Iraq?

High tech toy company whose laptops are being used by scientists studying rare organism that live in rock formations miles underground? By NASA Scientists searching for life and water on Mars?

High tech boy company whose laptops and Mac desktops are used by corporations for production work in multimedia and technology research?

Enterprise are often very slow at adopting new technology. Forward looking IT people are often hamstrung by bean-counters and forward looking CTO often is hamstring by recalcitrant IT groups. Enterprise also likes to trade volume for discount. Why should Apple play in such turf when it can make innovative devices and sell them to those who can appreciate them?

Can you imagine selling top of the line iMac at $1000 into some large corporation? Where is the profit margin that makes Apple what it is today?

I think a bit of critical thinking and critical analysis will help you understand the situation better.

Apple should more or less stay the course and let Enterprise come begging to its doors. If I were a successful business with a giant war chest and years of future growth ahead, I would not go begging to customers who want to pay peanuts for my well made product. WOULD YOU?





On May 11 11:53 AM Constable Odo wrote:

> I didn't think all the millions of songs sold and the billion or
> so downloads means very much in terms of direct revenue. iTMS is
> still considered merely a breakeven venture. I suppose if Apple
> can use iTMS to continue to directly drive sales for iPods and iPhones
> and somewhat for Macs that is somewhat helpful. However, RIM is
> undercutting iPhone sales and continues to gain market share while
> the various netbook companies flooding the market are slowing Mac
> notebook sales.
>
> I doubt if the iPhone being introduced to China is going to grab
> huge amounts of sales. Sales are likely to be relatively slow compared
> to U.S. sales.
>
> I'd like Apple to focus on getting the iPhone and Macs into the enterprise
> now that Windows Vista has alienated corporate upgraders. Apple
> hasn't done anything against RIM in the corporate sector since IT
> managers insist the iPhone isn't secure enough and can't be remotely
> managed easily in large numbers.
>
> Apple will continue to do OK and the share price will slowly rise,
> but investors need to be convinced that Apple is more than just some
> overpriced, high-tech toy company. This gaming ability that Apple
> is pushing isn't helping Apple's image at all for pulling in serious
> investors.
>
> I'm long Apple since 2004 and I want to see Apple make a name for
> itself in the corporate sector and not just some.. company that sells
> games for people on the run. Apple doesn't have a single product
> in the enterprise that can generate continuous sales and that's not
> good at all.

May 11 12:57 PM

[waf76:]

iphones to China will be huge. the only problem is that china carriers want an exclusive deal like att but apple doesnt want to do that...china mobile can't handle that right now and they are the biggest mobile company there so apple wont cut an exlusivity deal with anyone else

May 11 01:16 PM

[relayer75:]

"Insanely great" was in quotes in the article because it's a Steve Jobs quote. It's a phrase Jobs often uses to describe Apple's products. People who follow Apple generally know that.


On May 11 11:02 AM Techtrader10 wrote:

> Just a guess, but it would seem to me that Mr. Goodwin is long Apple
> stock. With comments like “insanely great' products" and "And we’re
> not even talking about the possibility of getting the iPhone into
> the hands of Chinese consumers", its hard to feel that he is objective
> in his evaluations (not many 3G networks in the rice fields of China).
> Since I day trade Apple (long twice, short once so far today) more
> than position trade the stock, I don't feel comments like Mr. Goodwin's
> affect my trading, but it does make me feel uncomfortable that novice
> investors see his comments and don't realize his comments are self
> serving.

May 12 09:38 AM

[Kirk Kirkpa...:]

Techtrader10 writes a know-nothing post. Why do people who know nothing about a subject, write about it?

My wife is Chinese. I have been there many times. I have stood on the Great Wall and looked out for miles and could not see a single building but I ALWAYS ALWAYS had a cell phone signal. One never loses a cell phone signal. China Mobile alone has 240 million paying customers. 240 million!!!! Then there is China Unicom.

I know not to listen to investment advice from people who speak from ignorance. In investing, that is deadly.


On May 11 11:02 AM Techtrader10 wrote:

> Just a guess, but it would seem to me that Mr. Goodwin is long Apple
> stock. With comments like “insanely great' products" and "And we’re
> not even talking about the possibility of getting the iPhone into
> the hands of Chinese consumers", its hard to feel that he is objective
> in his evaluations (not many 3G networks in the rice fields of China).
> Since I day trade Apple (long twice, short once so far today) more
> than position trade the stock, I don't feel comments like Mr. Goodwin's
> affect my trading, but it does make me feel uncomfortable that novice
> investors see his comments and don't realize his comments are self
> serving.

May 12 07:40 PM

[brewer:]

Techtrader and constable Odo always say the same negative things, and overlook any positives. Toy company, yeah, riiiiiiiight. Apple is kicking M$ and the board pluggers in the teeth. Look at the tech blogs for Win '7'. The name is as forward thinking and original as the product. There is nothing there but more registry cleaning and virus scanning. It will flop, maybe worse tjan Vista. The PC geeks are very upbeat about win 7, on the surface, but not very happy when you really talk with them. I have the win 7 beta and am totally unimpressed with it.

Apple wants there marketshare back. Steve job knows that 'enterprise' are in fact the dullards with the least need for an outstanding computer. But you know what? Everyone wants the best, and that is Mac all the way. Windows as you've known it is only another program, running (better and faster) on your Mac. Apple isn't afraid to let you run windows natively on you Mac because hardly anyone wants to do it--Mac OS is better.

Finally, make no mistake, Microsoft would giveits left (leg) and it's many failed divisions for one home-run like the iTunes Store!

May 12 09:13 PM

[Doug, Mtn. ...:]

On May 11 11:53 AM Constable Odo wrote:

"I'm long Apple since 2004 and I want to see Apple make a name for itself in the corporate sector and not just some.. company that sells games for people on the run. Apple doesn't have a single product in the enterprise that can generate continuous sales and that's not good at all."

Then you'd better get out Apple. Jobs has made it very clear that Apple is a consumer electronics company, not an enterprise company. And that he's content to leave enterprise to Ballmer, et al. Enterprise Innovation is an oxymoron. Jobs is obsessed with innovation, in case you haven't noticed. So get out of Apple stock now while you can and plow your proceeds into MSFT, where you'll be in enterprise heaven. Apple will continue to slog along in the consumer market and continue to make their billions there, much to your continued consternation. Or haven't you noticed that either?

Long on the stock since 2004, and you don't know a thing about Apple?

P.S.: Apple makes nothing on the Apps Store. Their billions must come from somewhere else, which you no doubt missed in the last five years.

May 15 04:43 PM