During Stormy Days For Apple, Remember The Fundamentals

Reflecting on my recent post on profiting from the Apple (AAPL) iMac launch, I can only say this: My prediction was wrong. If I had been forecasting the weather instead of Apple's stock price, I'd have predicted a nice, sunny day in Brooklyn Thursday instead of the tornado that actually landed there.

While the tracks are moving in parallel now, there certainly hasn't been any profit on the long side of the price movements yet. As noted in the prior article, prices decline about 1% going into an iMac launch and then rise an average of 1.5% the day after the launch, but we haven't seen any rebound this year.

Instead, AAPL stock price declined a tiny 0.1% going into the launch, then declined another 0.8% after. At the beginning of Thursday's trading, AAPL was down another 1.8%, and I expect to see the usual post-launch depression to continue for another day or two before the price ticks up again.

Now as I noted in the caveat on the original post, past performance is no indication of future results, and my little analysis there just proves that point again. Predicting a week of stock market prices is about as reliable as predicting next week's weather -- getting even 50% right isn't actually too bad.

But long term, the odds shift in our favor. Why? Because Apple keeps earning more money from its business. That's why I focus on revenues and earnings in my Analyzing Apple reports. Even with all the volatility we've had, Apple stock is still up more than 55% year to date, and more than 100% over the past 12 months. That's because the company keeps earning more money on a regular basis, and one way or another, that money eventually shows up in the stock price.

Said another way, I may not be able to predict the weather next week, but I'm fairly certain that December is going to be much colder here than it is now in August. Long-term, the fundamentals of seasonal weather and business are just a lot more predictable than the chaos of short-term results.

I remain confident that Apple's fundamentals will drive the stock higher over the next two years, simply because the fundamental business results remain good and growing. And who knows, Apple stock may recover even next week and give me some of my pride back by tracking the historical averages. But it may not too. After all, based upon historical averages, Brooklyn doesn't get tornadoes.

UPDATE: By the close of trading Thursday, perhaps it was actually AAPL stock on Wall Street that got hit by the tornado, not Brooklyn. The actual final tally was that AAPL stock was down 6.5% since the iMac launch day. Somehow, I don't think Apple is involved in sub-prime lending, but tornadoes tend to uproot everything in their general vicinity.

Comments

[quidozz:]

The stock was down another 4% earlier today. I expect it to go all the way to the 100s - maybe even to the 90s in the following weeks. That's a great buying opportunity. Let's just be patient.

2007 Aug 10 10:36 AM

[Malkiel:]

Unfortunately, as you indicate, investors are distracted right now and it will be interesting to see whether they even notice the anointed stocks through the Fall or whether Apple and everything else is facing a 20% decline regardless of fundamentals. I would think at this point that we'll be lucky to see AAPL share prices return to their recent level by the end of the year, notwithstanding an expected continuous stream of good news.

2007 Aug 10 10:40 AM

[Andrew:]

Apple's fundamental performance is going to be dependent on how well it can continue to introduce new products or versions of produts. As a luxury consumer electronics brand, apple need to continue to satisfy the top 10-15% of the highest income households (11.5MM-18MM households respectively).

The biggest risk to Apple's growth is maintaining talent and keeping them motivated. The execution of Apple's product development and marketing strategies have been unparalleled for the past 5 years, and the task only becomes more challenging as competition catches on.

Having said that, Apple's pricing power has become as strong as it's brand. Their margins are 2 to 3 times greater than competitors.

Apple stocks can rebound to all time highs by Christmas if:
- 1mm iphone sales in US by end of q3 (ahead of aapl schedule, but lower than crazy expectations)
-initiate sales in europe with good reception and buzz
-USD continues to be weak against Euro ($1.35 usd/Euro or higher)
-no global financial crisis.

The ramp up of iphone sales is critical to Apples future, as ipod sales are surely going to start declining by next year at the latest. While amortizing iphone sales over 2 yrs will be beneficial in leveling out earnings in the longer term, it may mean a slowdown in revenue growth next year.

2007 Aug 11 06:13 PM

[brewer:]

Highest income households have very little to do with this, actually.

2007 Aug 20 01:59 PM