"Cause the times they are a changing
And who can predict what’s next
Hey! You lost control
Even though you might have thought you had it all
And hey, it's just rock and roll"
Penned by the now defunct Central New Jersey pop-punk super group, Midtown, with the borrowed words of one Bob Dylan, these lyrics are now more pertinent than ever to the fast moving tech industry. As you probably know, last week was marked by a momentous occasion as Apple (AAPL) surpassed Microsoft (MSFT) in market capitalization.
Apple’s rise to dominance has been a long journey with obvious set backs but in the last decade they have been able to take over the world with their innovation of consumer electronics, that are in turn marketed to the most important demographics and are head and shoulders above all competition. To put it in ‘Buffettology’ terms, they have a clear durable advantage. Apple had a long standing cult following with Macintosh computers, and still does with about 20% of the market share, but this cannot compare to the market share that the 2003 3rd Generation iPod and 2004 4th Generation iPod would take hold of. Just a few years prior there had been a plethora of personal mp3 players but few came with such a user friendly transfer module (iTunes). Microsoft had their shot with the Zune, but I have never personally seen someone use this device. I know that it is in stores and probably works just fine but purchasing one would be like going to a single A baseball game in a major league park in the same parking lot at the same price and with free hot dogs (iTunes again).
2007 marked the introduction of the iPhone, which quickly took over the smart phone market and of course Apple earnings rose in accordance. In the meantime, iPod sales continued to dominate all others and iTunes had become the preferred online music marketplace despite the increasing availability of free pirated music.
That brings us to January of 2010. In the last decade Apple has grown from the$3 - $5 range to the $240 - $260 range with a price to earnings multiple that is unfathomably low given its sector. In fact, an interesting quip was made note of a few weeks back, mentioning the value of an investment if you were to have purchased shares of Apple in 2003 instead of your first iPod. In case you’re wondering, it’s a lot more than the same iPod is worth now…and now the iPad has been officially released, both at home and abroad and in the wireless 4G version. With its somewhat limited release, demand is still at extremely high levels while more are being pushed out of the factories. (The most current figure is 2 million sold.) This has given time to the other companies now developing pad like handheld devices, most recently Google (GOOG), which like the Zune and its counterparts will eventually bow down to its predecessor.
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As one of the most talked about stocks during these turbulent times, Apple is generally perceived to be a lock to reach $300 and onwards after the next few earnings are reported. Judging by previous earnings data including the few quarters following the iPod and iPhone, substantial gains are to be expected and we could probably start thinking about $350 and even $400 in the next 12-16 months. This can be seen in the graph following the release of these two devices.
With all of that having been said, Apple is a very expensive stock for the home gamers, albeit with a low risk level. So now we will focus on two much cheaper equities that feed off Apple’s gains. The first is Cirrus Logic (CRUS) which was made famous on May 7th by Jim Cramer, who noted that 30% of their total sales are from Apple. Cirrus makes the components that go inside the iPod, iPhone, and iPad, so as production rises, Cirrus revenue rises. Of course, being featured on Mad Money can lead to some immediate over pricing and this was experienced over the next few days. This preaching was following the May 6th ‘Flash Crash’ and some intense volatility that followed nearly erased all of the gains the stock had taken on May 10th.
Since then the stock has performed very sporadically, but then again, so has the S&P. Cirrus has a price to earnings multiple of 32, relatively low for tech stocks, and another positive quarter could turn skeptics into true believers. As the graph shows, Cirrus has moved almost in line with Apple over the past few years and with the international success of the iPad it is not unlikely that this $14 stock will break $20 in the near future. On June 1st Jim Cramer reiterated his feelings towards Cirrus. Below you will see a candle stick graph from the last month and a half. As you can see, they have moved into a trading channel of sorts sticking around the $13-$14 range.
A more intriguing play is the French cell tower equipment supplier and IP data compiler, Alcatel-Lucent (ALU). After an unsuccessful quarter the price has fallen from the $3.25 - $3.50 range to in and around $2.50, which is in line with their low earnings and historical price to earnings. Last week, Alcatel overseas president Adolfo Hernandez, claimed they expect to see a “massive impact’ as a result of the release of the iPad. This however does not necessarily fall in accordance with their historical prices in comparison to Apple.
In fact, looking at the graph there would appear to be almost no correlation at all between the two, But Alcatel plans on increased international business in expanding the wireless networks and all of the data that comes along with it. This also means that Alcatel is unlikely to falter if by some off chance an iPad competitor rises to the forefront. It is tough to gauge and predict the future earnings power of Alcatel, but as a shareholder I do hope it is positive since this position is currently sitting deep in the red.
Going back to predictions, it is difficult to estimate when these “massive impacts” will be felt and a great deal of further evidence will be needed before one should consider purchasing ALU. With that being said, the potential is there if they are truly linked to the iPad’s success. In summation, it should be a very interesting 6-12 months for all three of these securities and increasing and hopefully sustainable price gains should be expected as the global economy begins to fall back to normalcy.
Disclosure: Long Apple and Alcatel-Lucent