One technology company making headlines continuously is Apple (AAPL). The company has managed to grow from a start-up to an international powerhouse and internet leader, in my opinion, due to its intellectual property. Apple's capacity for innovation is, however, both its curse and blessing. While innovation has raised investor expectations, it also provides Apple an outlet for more growth.
Thus far, Apple has leveraged its trademarks and other IP into a household name synonymous with user-friendly technology geared toward everyday life. The company also has a long history of beating estimates and growing revenues. In fact, the past quarter was yet another record for the company, and the trend is expected to continue through 2012 and beyond.
Apple is, however, not immune to sluggish discretionary spending, particularly in emerging markets, where it is making toeholds. While global growth is slowing, it remains positive on strength in emerging markets such as Asia, and continued recovery in the US. Emerging markets have been a growing sector, providing strength for other industries as well as technology. Using oil as an indicator of world growth, expansion of emerging markets and increased consumption in Asia are estimated to offset weakened demand in the US and Europe.
Furthermore, total world GDP growth is estimated in the 2%-3% range, with China leading the way at 8.5% growth in 2012. The US domestic economy is also growing, expected to increase to around 2.5% from the recently released 2011 number of 1.75%. Apple is affected by GDP growth, both domestically and worldwide, because growth percolates into discretionary spending. For the most part, Apple's products fall squarely in the discretionary category.
Thus, in the face of all this expansion, and with a solid history of earnings growth, why is Apple's stock looking so weak? It cannot be as simple as the loss of Steve Jobs. The founder and creator of the iconic brand had been ill for a long time, and Apple had been able to maintain its momentum. Additionally, the company released first quarter 2012 results about a week ago, satisfying expectations.
Apple's quarterly revenues and earnings reached their highest values ever on record sales of core products. As a group, iPhone, Mac and iPad sales set all-time company records. In 2011, revenue and earnings grew by 77% and 116% on an annual basis, respectively. The gross margin increased by over 6%, and international sales counted for 58% of the quarter's revenue.
Investor expectations have increased, but the problem with the stock is that investors also question Apple's ability to continue its growth trend through 2012. As noted above, domestic growth is important for discretionary spending on Apple's products. The US economy is improving, albeit slowly, and is expected to increase in nominal size by about 1% from 2011.
Mainland China and the rest of Asia are still growing rapidly, but growth rates are in decline. China has reduced its own estimate for GDP growth modestly, from 9.0% to around 8.5%. Recent data shows that this may still be an optimistic estimate. Fourth quarter 2011 China GDP is already 8.5%. Some analysts fear China has entered a long-term period of economic slowing, which could be a natural pause in its growth cycle. If China makes a hard landing and growth slows materially, Apple could take a significant hit to its Asian sales.
Investors are still responsive to positive earnings, but gains no longer hold. On January 25, the day after the company's latest earnings release, Apple's stock jumped up by more than 6% to all-time highs over $450. The jump sparked a massive round of selling that left the stock down on the day, but up for the session at an all-time closing high. Similar volume spikes and negative moves have signaled short-term corrections three times in the last six months.
The long-term trend, viewed on five-year/weekly and ten-year/monthly charts, has been weakening and in my opinion, indicates the potential for price correction. The stock has been moving up since early 2009 without a pause. Average volume is in decline, indicators are weak and the stock has made three up-legs without a significant retracement. Apple is a textbook case of an overextended stock.
Apple, currently trading around $450, is potentially due to correct. Mitigating trades, such as selling calls, protective puts and bear spreads are in order. The current put/call ratio listed on OptionsXpress is 62%, suggesting optimism among the average Apple investors. The full-market short-put/short-call ratio, a measure of sold options versus bought options, is high at 77%. A look at the volatility chart shows historically low levels, usually a good time to buy options because they are cheap.
Apple is not going to tank, the company is strong and continues to reach new highs in revenue, profits and margins. It is likely to correct and other tech giants have already seen it happen. Internet rival Google (GOOG) has been trading down this year, despite positive earnings. Full year revenue was up 29% in 2011, and quarterly revenue topped $10 billion for the first time. Fourth-quarter revenues grew across all market segments, including internationally, accounting for about 53% of total revenue. Despite this, the stock is down about 11% on the year. Google is expected to continue posting profits and growth through 2012, just not as much as before. This is what is keeping the stock down, and what will bring Apple investors out of the clouds and back down to trend.
A telltale sign of a potential decline in growth in mainland China is Chinese-based Baidu.com (BIDU), which is also underperforming. The appetite for tech shares waxes and wanes, and if sentiment towards China shifts towards expecting slower growth, Apple shares could take a hit in anticipation. Baidu.com, due to its US cross-listing, is an excellent barometer for both domestic and Chinese appetites for risk. Rightly or wrongly, like most tech stocks including Apple, the company is still perceived as a risk-on trade.
Baidu.com is expected to report earnings on February, 16. The previous statement, third quarter 2011, included revenue and profit growth over 80% each from the same period last year. The gains were attributed to customer spending and user traffic. The company expects to post fourth-quarter results inline with the third quarter and meet expected revenue and profit growth around 80%. With numbers like these, this stock should be shooting up in price. However, like Google, and Apple, investors just don't see the company being profitable this year.
To power growth going forward, Apple needs to continue innovation in both the handset and tablet markets because that is what consumers expect. Apple has put its weight behind the Thunderbolt data transfer technology, and Apple's secondary (i.e., follow-on) patent application suggests protection for the technology's use with iOS. Patent protection in this area would mean Apple would have a technology that transfers data at an incredibly fast speed between media players and display devices.
Competitors would have significant difficulty competing on the speed front, particularly for streaming applications and raw data transfer. For sophisticated investors, this is the key technology to keep an eye on, as it is likely to be Apple's way to differentiate itself from what will likely be a market flooded with quality handsets and tablets over the next two years. I anticipate potential margin expansion for Apple tablets and the iPhone, depending on the premium the company can charge for applications that use Thunderbolt technology.
Apple's ticket to exciting investors and rebuffing concerns about growth in its key markets lies in its technology. While its capacity to innovate has set investors' expectations at a high level, Apple appears to be able to immunize itself with further innovation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
