Two weeks ago, Apple (AAPL) announced its fourth quarter earnings. The company reported record revenue of $57.6 billion, or $14.50 per share. Net profit came in at $13.1 billion and gross margins increased from the prior quarter to 37.9%. These figures all beat the Street's estimates of $14.07 on revenue of $56.5 billion. The numbers also beat the 2012 Q4 metrics of $54.5 billion, or $13.87 per share. When the headline numbers hit, my immediate reaction was that the market response was going to be very positive. I anticipated seeing the stock jump in after-hours trading. Yet, as Mr. Market would have it, the stock did quite the opposite, instead dropping some $50 after-hours touching the $500 mark.
There were two main reasons for this abrupt and sudden sell-off. First was the fact that Apple did not sell as many iPhones as the Street had hoped for, selling only 51 million for the quarter compared to the estimates of 55 million. I think it is important to mention that even though Apple did not sell 55 million new phones, the 51 million that it did sell represented a net increase in iPhone sales of 3.2 million compared to the year prior. The second reason for the strong sell-off came when the company issued its 2014 Q2 guidance, which was basically flat, leaving little to no room for growth. The company stated that it believes revenues will come in between $42-$44 billion, with gross margins to be between 37% and 38%.
It's important to note that in the week leading up to this announcement and even after the earnings release, Carl Icahn was tweeting (which seemed like hourly) on his Twitter (TWTR) account that he was buying another $500 million worth of the stock. I think after the dust finally settled, he ended up buying between $3.5 billion to $4 billion in stock, depending on when you start counting his tweets. This was all part of Icahn's bigger plan to push the company into increasing its current buy-back by an additional $50 billion in stock.
Having Carl Icahn buying as much stock as he was seemed like a positive catalyst to me, but I still remained quite cautious knowing that the stock could continue to take a turn down, similar to what happened to Transocean (RIG) this past year when Carl tried to instill change there too. Even among all of the negative media attention, selling pressure and volatility the day after earnings, I still did end up buying the stock at $500, while also selling puts at the $480 and $385 levels, just in case I was wrong on my entry point.
At $500 per share, the stock to me represented a great value. With a forward P/E of 11, $160 billion in cash on hand, a book value of $145 per share, a huge buy-back program and a respectable dividend, I felt that I had made a smart move. Little did I know that Apple CEO Tim Cook was thinking the same thing. In the weeks following the earnings release, Cook had accelerated the company's buy-back program to take advantage of the depressed stock price.
The Wall Street Journal was first to break the story that Apple had accelerated its buy-back by purchasing $14 billion of its own stock in the weeks following the earnings release. This was a significant increase from the $5 billion that it had bought in the prior quarter. This move further closed the gap on the $50 billion buy-back plan that was announced last year, with $40 billion of that $50 billion having now been repurchased. Back when the original buy-back was announced, CEO Tim Cook stated that he wanted to be opportunistic in his buying back of stock, and after what he believed to be an unwarranted 8% sell-off after earnings, it was the right time to buy.
Consequently, after that news hit, Carl Icahn also withdrew his push to get Apple to increase its buy-back plan by another $50 billion. Icahn stated that given the influential proxy advisor's call against his proposal and the news of the accelerated repurchases, he would cease any more efforts to increase the buy-back.
The news of Apple actually staying true to its word by making the buy-back truly opportunistic and not just a blind buy-back like so many other companies is a clear sign that the company truly believes in its products, valuation and future growth. Additionally, it puts a new temporary floor in the price of the stock. Since $500 is where the company views itself as being cheap, that is now where the Street will view it to also be cheap. Since this announcement, the stock has hence shot back up into the $535 range.
This type of move on the company's part is brilliant, in my opinion. It reminds me back in 2011, when Warren Buffett did something similar on his own Berkshire Hathaway (BRK.A) (BRK.B) shares stating that the current price (then 110% of book value) was undervalued and he intended to buy them back. Similar to what just happened to Apple's stock, Berkshire shares after that announcement almost immediately shot up in price and a new floor had been created.
As Apple begins 2014, investors should start to see the benefits of the new China Mobile Ltd. (CHL) deal that was struck late last year. Investors also are remaining hopeful that 2014 will be the year that Apple announces some new products and categories the company intends to get involved in. Rumors continue to circulate about a new iWatch that could enter Apple into the entirely new category of wearable technology. This is something that Samsung has already developed but has had limited success with, thus far. Additionally, rumors are buzzing about the possibility of what is being called "iAnywhere", a new computing platform that would virtually allow users to dock their iPads or iPhones into configured displays and run them like a normal computer. This, of course, would be a major game changer for the company and would no doubt give revenues and margins a much-needed boost. Again, all of these reports are based on speculation, with nothing being officially confirmed.
The one thing that investors did get confirmed this month is that Tim Cook believes that Apple is on the brink of something important, and at its current valuations, the company is terribly undervalued and should be bought anytime the stock is at or below $500 per share.