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Paulo Santos, Think Finance (375 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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There is something going on where Apple (AAPL) is similar to Yahoo (YHOO), GSV Capital (GSVC) or Take-Two Interactive (TTWO). I call it the "then what" problem. You see, Yahoo holds one-quarter of Alibaba, and it tends to go up as long as Alibaba doesn't IPO. After all, Yahoo is the only way to put money into Alibaba today. GSV Capital worked the same with Twitter (TWTR). It went up until Twitter IPO'd, but once Twitter was available, GSVC lost its allure and fell. Take-Two Interactive launched GTAV which beat all expectations, yet TTWO stock no longer went anywhere after that.

All of these equities traded higher in anticipation of an event everybody knew was going to happen, even if in TTWO's case the event wildly beat expectations. Indeed, Yahoo is still trading higher on the yet-to-happen Alibaba IPO, while GSVC has already seen the summit. Apple, for its part, is doing exactly the same. It's not waiting for an IPO, though. Instead, Apple is trading higher on anticipation of the China Mobile (CHL) deal, where rivers of wine and honey will flow from the 760-million strong China Mobile subscriber base - the largest in the world.

This anticipation has two characteristics:

  • Everyone knows the deal is coming;
  • The deal is obviously positive for Apple.

However, this anticipation also has a major problem. Anyone which wants to be long Apple, is getting long ahead of this obviously positive deal, which is days away from being officially confirmed. This begs the question, once the deal happens:

  • Then what?

Then, there's not going to be any more potential China Mobile deal. While China Mobile will help numbers for between one quarter and one year, one should remember TTWO's GTAV and how it wildly beat expectations and it still didn't matter. The absence of a potential large positive in Apple's future will thus become a major headwind right after the China Mobile deal is announced. That's the "then what" problem it faces.

And again, this is similar to Yahoo. Alibaba IPOs, then what? Similar to GSVC. Twitter IPOs, then what? Or Take-Two. GTAV is a massive success, then what? And it's also a form of "sell the news", to boot. GSVC and TTWO equities have already gone through this process and behaved negatively after the event. YHOO is going to do the same.

Either way, this makes it likely that Apple performs well right into the China Mobile announcement, and then performs badly right after that announcement, and not just for a day or two. This is a recurring theme in the stock market, and other than a massive new product success, Apple is going to go through it again.

Conclusion

Apple is expecting a widely anticipated event, the announcement of the distribution of its iPhone in China Mobile's network. This is a very positive event for Apple, fundamentally. But at the same time, it will quickly bring a "then what" problem. There are no more China Mobile deals after China Mobile.

So here is the prediction. Apple stock will do badly right after the deal is announced, and will continue to do badly afterwards for a number of days/weeks, on this effect.

Source: Apple Faces The Ever-Present 'Then What' Problem