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Summary

  • The $400 million settlement with NY AG Schneiderman took 2% out of Apple shares.
  • It was timed with Apple's massive announcement that IBM would be developing software and selling Apple hardware.
  • Long-term investors who look at earnings power should see this as a catalyst to buy not sell.

On the first trading day after Apple (NASDAQ:AAPL) offered its biggest announcement since the iPad, shares dropped 2.5%. What gives?

Settlement announcement offset IBM partnership news

Mid-day, New York Attorney General Eric Schneiderman announced a settlement with Apple over its participation in price fixing of e-books. The announcement was posted on the AG's website mid-day, but the stock started selling off even before the open. Is it possible that the news was leaked and traders had a heads-up that the news would be occurring? Maybe the attorney general should be more focused on insider trading than price fixing of discounted e-books.

Just how painful is the cost of the settlement for investors?

The settlement is massive! It could involve payments of up to $400 million to consumers nationwide, and is clearly a feather in the cap of AG Schneiderman, and should impact shareholders by as much as six and a half cents!

Really, it's less than a dime!

Apple's share count at the end of the March quarter was 880 million shares, but the stock has split 7-for-1 since that time. Forgetting buybacks for a minute, this leads us to a massive share count of 6.2 billion shares! If you divide 400 million by 6.2 billion, you get more or less $0.065.

If you agree with this logic, the $2.17 decline from yesterday's open to yesterday's close seems a little misguided, and represents a catalyst to BUY, not to SELL. Investors should be focused on the long-term earnings power not fear-driven headlines.

The impact of the IBM announcement is absolutely huge. According to Apple's most recent 10-K ,the company has 80,300 employees, of which 42,800 are in retail. IBM (NYSE:IBM), on the other hand, has 431,212 employees, according to its 2013 annual report, many of which will be incentivized to sell iPads in the future. Apple has more than doubled its sales force almost overnight!

The deal makes sense for both parties

IBM is not a retail-focused company, it's an enterprise company that is dedicated to providing enterprise solutions. Apple, on the other hand, is a consumer company that is focused on providing innovative technologies outside the workplace. This deal takes two of the world's largest companies and combines their power. Apple will have global reach, making it possible to do projects like rolling out iPads to branches of the Singapore government. (Don't get too excited, this is just an example)

Like holding a beach ball under the surf, it's unlikely to stay down long

Long-term investors just received a secondary gift from the New York AG; he created artificial pressure on a stock that is seeing a dramatic expansion of its global sales force. How many digital copies of copies of The Fault in Our Stars will you be able to buy with the profits?

Apple is expected to announce earnings after the close on July 22nd, and investors are expecting $1.23 in earnings. This will be an interesting quarter as we await the launch of the iPhone 6 and the company comes off the sell-in sugar high from its launch in China.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. I hold not personal positions in IBM or AAPL but have purchased shares for my clients in the past.

Source: Why Apple's E-Book Payout Is A Catalyst For Investors