Apple: Sell the News, For Now - Barron's

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

Fight Apple's Temptations -- Briefly I, II by Mark Veverka and Stephen Sears

Summary: Apple (AAPL) shares have risen over 40% since its January iPhone revelation. At 5x sales and 34x 2007 earnings, the market has already priced in a lot of growth. "There's been such hysteria around the phone that it led to what I would regard as a premature increase in the share price," says Wolf Bytes author Charlie Wolf. Even at CEO Steve Jobs' stated goal of 10 million units, revenue of $500-600 million would only add about 2% to Apple's forecasted $21.6 billion.* And if serious hardware problems or service glitches arise, shares ($122) could drop below $100. One analyst notes that letdowns have followed previous launches, and another says he's cutting his Apple stake with the goal of rebuilding it once the post-launch dust settles. Barron's suggests taking some short-term profits and getting back in on a dip -- perhaps spurred by the fall arrival of Mac OS Leopard, with its ability to boot into Windows. Other possibilities include selling out-of-the-money calls against shares to capitalize on Apple's inflated volatility, buying relatively inexpensive puts to profit on a dip, or initiating call spreads -- selling 135s and buying 125s.

[*SA Editor: My calculator says Barron's is off by a factor of 10.]

Related Links: Apple to Exceed 500,000 iPhone Sales This Weekend? • Cowen Advises: Place Your Mobile Internet Bets On Google, Not Apple • Will the iPhone Suffer From Apple's First-Generation Problems?

Earnings call transcript: Apple F2Q07

Comments

[shaik:]

Hi,

"off by factor of 10"!!?? 1 million they will sell in the first week...
so 10 million by the end of the year seems not so odd. Did someone
said "holidays season"?

Mistakes can happen....

2007 Jul 01 09:32 AM

[Oh Blah Dee...:]

ALL of the reviews of the Apple iPhone have been positive. They note some activation glitches and wish some features were added to the initial model, however, they are almost unanimous in praise of the device. I expect Apple to deliver models ABOVE and BELOW this first iPhone. In addition, reports from non-scientific surveys indicate that Apple computers are selling far in excess of the growth rate of PCs.

Apple is expected to announce rejuvenated iMacs and is believed to be readying iPods having the display used in the iPhone. These new high-end iPods are expected to have very high storage capability and could fill in the market opening for those who must use a Blackberry cell phone and yet still have need of an iPod. A smaller and lighter notebook is also expected to fill in the "road-warrior" market for executives and those who want a powerful, small, low-weight notebook.

"If serious hardware problems or service glitches" do NOT arise Apple could move up dramatically. Why? Because the stock market for this company is LOOKING AHEAD to 2008 earnings! Apple is dramatically growing in its three markets: computers, iPods, and cell phones. Sell Apple and buy back on the dips? Those who sold when Apple hit 100 are already behind by over 20 dollars per share. Apple is leading in its categories and its software is the best. Read the first reviews that discuss the iPhone user experience!

The best and fast selling notebooks, widescreen-iPods coming, successful iPhone launch, revolutionary Leopard OS, notebook THIN, updated iMacs soon.

Sell Apple? My opinion is to hold Apple, or buy MORE.

Disclosure: I'm long Apple stock AND Apple options!

2007 Jul 01 09:39 AM

[peter:]

Ed,

Your Math is WAY off when you wrote "Even at CEO Steve Jobs' stated goal of 10 million units, revenue of $500-600 million would only add about 2% to Apple's forecasted $21.6 billion.* That math would mean $5 to $6 Billion in revenue which is 25 to 30% of their $21.6 Billion in annual revenue. Not including any P/E multiples that would bring forward stock price to somewhere in the neighborhood of $165.00 a share

2007 Jul 01 09:44 AM

[SA Editor E...:]

Peter et al,

Please note that the math is Barron's, not ours. I did note the error in a footnote (*), but left the article in its original form as it appears on Barron's website.

Eli

2007 Jul 01 09:47 AM

[peter:]

Be warying of anyone telling you to sell the news...they're looking to buy the dip since they are late to the game

2007 Jul 01 10:00 AM

[rlh:]

I agree Peter. The analysts advising to sell are standing in front of a fast moving freight train yelling at the top of their lungs but only those nearest them can hear them and follow their advice. They will be drowned out by all the AAPL sales stats and rumors of newer greater products still in the pipeline that speaks to the relative strength of this stock. My dad has always told me not to be a market timer, believe in a company and stick to it. Apple is a good one to believe in. Made millions already and will make millions more before the party is over.

2007 Jul 01 10:28 AM

[CH:]

Not to mention that in a few weeks, apples Q2 earnings come out, and I have little doubt it will be at the highest end of expectations. If someone thinks otherwise, post a reply. But if your gonna take a breather on your Apple portfolio, don't let it last long. Theres gonna be a much smaller summer dip than last year.

2007 Jul 01 10:35 AM

[omodes123:]

What lack of foresight. I bought an iphone and i've been resistent to the new apple revolution for a while. But this device is truly genius. Good bye hardware phones and wwlcpmw to the dawn of the softphone. The revenue streams are endless. How many new itunes subscribers are there now? Furthermore considering the ui is all software one can upgrade their skin to some extent and feel like they have a new phone. Being a software developer I have a much deeper apreciatipn for want they've pulled off and know the competition is lightyears behind. Now I know the culture of 'think different' is alive and well at apple. (written from the iphone)

2007 Jul 01 10:42 AM

[Dan Poarch:]

Hysterical! "wwlcpmw to the dawn of the" the new multi-touch keyboard. Ha! ; )

2007 Jul 01 09:55 PM

[akindman:]

Priceless.

2007 Jul 01 10:58 PM

[peter:]

Choops - They claim GOOG is cheap at $520 trading at a 46 P/E because it grows at a 20 to 30% rate...I agree...so I wonder what that would mean for a company trading at a forward 2008, P/E of 29??? Between products, earnings and MULTIPLE Expansion the price neighborhood commands a range of 165 to 180 just performing to the middle of earnings expectations...THAT SOUNDS LIKE A NICE NEIGHBORHOOD!!! To John: I've been a part of the apple culture since 82'...seen some good times and some bad times...but these times are unprecedented...apple, the people who build, engineer and contribute their intelligence are to be applauded for all they've done and will do. in the future..CONGRATULATION...

2007 Jul 01 12:54 PM

[James Cullen:]

Regardless of what the iPhone does, how can anyone state right now that Apple is a proven, reliable company? They have had one hit product in more than two decades of business. How does that make them a good one to believe in?

Some old wisdom to consider:
"The chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions." - Benjamin Graham

2007 Jul 01 01:55 PM

[Dan Poarch:]

Do your research.

2007 Jul 01 09:56 PM

[the teller:]

The rise of AAPL is not the result of iPhone hype or any other hype. It is due to its Earnings. Apple is gonna earn close to $4.00 per share in this fiscal year and just to maintain currant p/e it has to rise to $150 by December/January. Apple sports an EPS growth rate of 70%-80%.

Yes I'd love to buy on a dip. Please stupid, scared, small time investors, sell sell sell! I'll be the first to buy more @ $100.

2007 Jul 01 02:21 PM

[brewer:]

I'd say if you think it's going to sink slowly and you can get back in then fine, go ahead and sell. But if you think you are going to get back in after a plunge, you are sadly mistaken, because the large accounts are only simulating a melt down by selling massive volumes during the day, to drive the price down, then the bastards will buy it all back up at night, like they did before mac world. I sold then and eventually bought back in at a few dollars loss per share. I am glad I did, because it went straight up since then.

I am happy though, I earned from 66 to 85, then bought back in at a little less than 87 after the Macworld hysteria, and now there is no way I am selling. But if it goes down, don't wait too long because I will be buying, especially if the Wintards all sell their stocks short.

Apple is taking over the entire technology industry, and if you don't see it by now then you are a total idiot.

2007 Jul 01 07:48 PM

[bradah:]

I remember a Seinfeld espisode where George decided to "do the opposite" of every instinct and urge he had.....things worked out for him. When I here analysts telling me to sell.....I "do the opposite".

Back when AAPL was at $7.00/share I almost borrowed some money to buy 1000 shares..... Fortunately, I was able to get in in the low 40s when rumors of the video ipod where on the internet. I've held on since then.

I like what John C. said about revenue new revenue streams through iTunes....and what about the "iphone halo" effect? I have to believe the there are people right now in Apple stores looking at purchasing their first Mac -- all because of the user experience with the iphone.

With the future looking so bright, the hard part will be knowing when to sell..........

2007 Jul 01 09:11 PM