The defining characteristic of Apple (AAPL) stock during this stage of tech hyper-growth is that it always bounces. This is what makes Apple the best investment vehicle on Wall Street. As an investor there are times to demonstrate conviction and there are times to run for the hills; the current five day selloff that started because of the iPhone 5 delay rumors represents a time to demonstrate conviction. These moments of uncertainty have a way of compelling buyers to get back in the game which is exactly what we anticipate will happen in this case. Although we doubt the validity of the rumor, let’s assume it is true, and provide five reasons why an iPhone 5 delay doesn’t matter:
1. Apple has too many successful product lines. Since the release of the first iPad it’s been amusing to read analyst reports that attempt to explain the underlying variable that will catapult Apple stock. Some analysts choose to talk about the Mac, others talk about the iPhone, and lately many talk about the iPad. Any one of the three could be responsible for taking to stock to $500. As of December 31, 2010 the Mac reported year over year growth of 17.1% compared to the rest of the PC market declining 0.6%. In the business sector the Mac showed 65.4% year over year growth and in the government sector it saw 549.5% growth. The MacBook Air alone accounted for 420,000 units in CYQ4 representing 333% year over year growth. JP Morgan analyst Mark Moskowitz recently reported that MacBook Air annual revenue looks poised to total $2.2 billion or better. The iPhone witnessed 86.2% CYQ4 year over year growth [without Verizon (VZ)] and the iPad 2 is on track to outsell the original by as much as 300% according to recent estimates. A three month iPhone 5 delay causes no material impact on the company as a whole.
2. Apple has officially turned into an international juggernaut. 62% of revenue comes from international sales. Investors should be careful when placing too much emphasis on a U.S. iPhone launch date. Tim Cook identified China as their top priority and mentioned that results in the Asia Pacific region have been ‘absolutely staggering’. CYQ4 revenue in China was up 4x year over year with Apple retail stores in China becoming their most trafficked in the world. The future for the iPhone in China looks as bright as any in the tech sector. Morgan Stanley recently released the results of its Chinese mobile phone survey from February and March that showed 87% of respondents plan on purchasing a smartphone and 30% indicated plans to buy an iPhone. That number goes up to 53% if iPhone prices get cut. To think that half of Chinese mobile phone users want an iPhone is beyond stock price comprehension. Producing a hit product in China was never a guarantee for Apple, let alone any other U.S. company. Gone are the days of Apple analysts being able to wrap their arms around this company by visiting a few stores in New York City or Minnesota. The only reliable source of Apple information arrives four times per year in the form of quarterly earnings reports. For this reason, earnings reports will soon become more important drivers of stock action than they have ever been before.
3. The third reason why the iPhone 5 delay doesn’t matter is because launch quarters aren’t that great for the stock anyway. AAPL performance in June, July and August is typically weak following the introduction of the iPhone. The 2010 sales numbers at launch were 14.1 million units for the July quarter compared with 16.24 million units in the holiday quarter. There are all sorts of supply issues related to a launch that limit the total sales.
4. Apple’s stock valuation is already at rock bottom. Apple stock is like a boat floating two feet above the ocean floor and yet everyone is still worried that it’s going to sink! If the iPhone 5 is delayed does that mean the forward P/E should drop from a 9 to a 7? Excluding cash, we’re already in single digits! This stock is at the cheapest level of the Steve Jobs era and yet the company has never been stronger. The stock price cannot keep up with the company’s growth. Apple has turned into a deep value stock being held back by unfounded fears. We’ve heard hundreds of delay rumors over the years and all of them supposedly had legitimate supply chain sources but how many of those rumors turned into actual events that hampered Apple performance? Zero. Let me say that again, zero. Zero. Zero. Zero. Investors spend too much time worrying and not enough time reconciling the numbers. Do you remember what the actual growth numbers were for Apple last quarter? How about 70.5% revenue growth for the December quarter after reporting 66.7% revenue growth in the September quarter. BusinessWeek recently ran a story that projected 50% revenue growth for the next two years as the mobile app boom fuels demand for all Apple products. Those who doubt Apple’s ability to grow need to take a step back and realize that we are in the middle of an app revolution that could eventually put the .com bubble to shame. George Colony of Forrester Research adds, “As more consumers and businesses access entertainment, productivity tools and other services by way of apps -- creating an "app Internet" -- the less likely they are to rely on the traditional Web."
5. And the last reason why the iPhone 5 delay doesn’t matter is because it probably won’t even happen. This is a classic case of Dumb, Dumber and Dumbest. In my opinion those who spread the initial rumor are "Dumb" for supposing that Apple would bombard the market with new iPhone’s, new iPods, new Macs and even an iPad 3 all at the same time this fall. I don’t care who your source is. Unless it came from Steve Jobs himself it’s just a rumor and is unfit to ever get published. The "Dumber" award goes to those Apple analyst’s who actually changed their estimates based on this rumor. As an analyst, shouldn’t your top priority be to get the facts straight before passing judgement? I don’t care if this rumor ends up being true of false, at this moment in time it is an unknown and no good analyst should take that as fact. And the "Dumbest" are those who are extrapolating this negative iPhone perception to presume the iPhone to be "dead in the water" as Henry Blodgett recently did or report. Wow. I’m glad we have that prediction in writing and that’s all I’ll say about that.
As an investor, you can never perfectly predict what it will take to get a stock to drop to a level that compels buyers. If the iPhone 5 delay rumor serves as that kind of beguiling catalyst, than so be it. The stock will find its short term bottom and bounce as it always does.