Apple at $135: Low Hanging Fruit

Apple Inc. has enjoyed being a cornerstone of the bull market of recent history. Between July 2006 and the end of 2007, AAPL shares experienced dramatic and impressive price appreciation from about $50 to nearly $200. However, as is true of the market in general, 2008 has not been kind to Apple. At present, Apple is trading just above $130, an almost 35% drop in just over 3 weeks. This selloff has brought Apple shares back into an attractive enough level that it is now on Ockham’s buy list.

Apple shares were headed down from their lofty levels before the Macworld conference on January 15th in San Francisco. The annual Macworld event showcases Apple’s newest products for the marketplace to salivate over. However, this year lacked the kind of epic product that makes investors swoon, unlike last year which saw the introduction of the iPhone. Steve Jobs, Apples’ charismatic, visionary leader has not been resting on his laurels, and the ultrathin MacBook Air was introduced weighing just 3 pounds. It was also announced that Apple looks to take a share of the movie rental business, a service that will be available via the iTunes interface and capable to watch on an iPod as well as TV or computer. Apple also announced updates that will improve already existing iPods, iPhones, and Apple TV which should make these products even more desirable.

However, without the eye-popping headliner that the iPhone was last year, the devoted fan base was not impressed, and neither were investors as the stock continued to drop in an admittedly weak environment. Then on Wednesday AAPL provide earnings guidance that fell below estimates and this initiated another sell off. Even though the revenue target predicted growth of 29% it was still considered well below what Wall St. expected. It is clear to us that analyst estimates were way out of line with reality. It seems illogical, but Apple has set the bar so high, that if they don’t unveil the sexiest product on the market every year then their Macworld showing is deemed a failure.

There are plenty of reasons to be excited about the future of Apple Inc. For starters, the stock is almost 35% cheaper than it was a month ago. Furthermore, Apple has developed a multifaceted entertainment and functionality based empire. iPods have revolutionized the music industry and almost single-handedly pushed the industry into a digital age. And they still control over 70% of the market for digital music players. iPhone is on the same path in the rapidly growing smart-phone arena, and Apple expects to meet sales goals of 10 million units by year end 2008. The Apple OS Leopard is selling quite well and is considered by many to be superior to rival Vista.

To sum it up, Apple has the products that consumers want, and as seen with the newest software updates, they are constantly striving to improve. They have developed a large, growing, and devoted customer base, many of which own several of Apple products. The company, under the leadership of Jobs, is integrating products to do more for the consumer. Jobs will continue to lead, innovate, integrate, and challenge AAPL’s competitors to live up to its products, and he shows no signs of slowing down. The recent sell-off exposes estimates that were not realistic, but AAPL is now an attractive candidate for those looking for a smart buy.

Comments

[Thomas A, Gaughan]

good artilce,
Thomas a. Gaughan

[awcabot]

Actually Apple delivered better results than analyst forecast for 2008q1 and Apple has consistently provided conservative earnings guidance, seldom above the estimates that analyst publish. I would believe that Apple finance has been quite good at managing analyst expectations, without being too bullish, but letting the results speak for themselves.

[Long-Short Guy]

It's amazing to see the difference between apple fans who bought the stock and seasoned traders or investors.

Apple is a momentum stock; and you don't own momentum stocks in the short term when they lower their guidance and there's a recession. Maybe it will turn out to be a good 5 year investment, but there's no way you want to own a momentum stock with broken momentum in the short term.

It really is that simple.

[Top_tier]

It was widely accepted that the iPhone was going to be announced at the 07 Macworld. And many pundits thought the iPhone would be a flop when it was announced in Macworld 07. Not enough battery life, keyboard won't work, touch won't be accepted, on and on. It wasn't until mid year that the phone proved itself. So it's a misnomer being propagated to state what made Macworld 07 a success was the iPhone, therefore to punish Apple because they didn't unveil another iPhone type product is laughable.

[2old2run]

Finally, a rational, well articulated article about Apple Inc.

[David Lentz]

There are sound and logical good reasons for a pullback in AAPL.

1) The iPhone is showing signs of slowing growth, most likely in anticipation of the HSDPA iPhone that will likely be released (no knowledge here, just guessing) in the May-July timeframe.

2) As discussed in their earnings conf call webcast, they successfully transitioned the old iPod into a new theme (the iPod Touch) that expands the potential of the devices while incurring the additional expenses of R&D (lightened considerably by borrowing heavily from the iPhone) and more expensive new component technologies (large amounts of flash memory, large hi-res touch screens with glass faceplates). These expensive new technologies will decline in cost over time, and the prices of future iPods following in the path of the Touch will come down as well, paving the way for a migration of older iPods into replacement units. But near-term, this means a slowdown in iPod growth. That pretty much always happens when an older product is radically transformed into a new product addressing a different need. Also, they are now more dependent on that market expanding, as there is little left to be gained in market share. They effectively own it all.

3) The odds of a consumer pullback in spending, in the face of inflation and rising unemployment, means that Apple must swim against the tide to grow at rates similar to what they have recently grown at. An unlikely proposition, although I wouldn't count them out.

4) The current quarter is a seasonally weak quarter. Always has been, always will be. The next one is not much better. Same thing for any retailing business. Some quarters are better than others. For Apple, the last 2 quarters of the calendar year are when the money gushes in (even more so than it normally does).

So it is perfectly reasonable for Apple to back off from the sky-high growth expectations for a quarter or two. At the current levels, it seems like a screaming buy to me, but one that will likely bump along at these levels for a while. There's no need to rush in to grab the bargain. Wait and see what happens in the economy at large, and accumulate some cash, watch and wait for it to plunge down below 130 again, when Mr Market goes berserk next . By year-end it could (and very likely will) be setting new highs again.

But that's no reason to pay more for it than you have to.

I just wish I had possessed the wit to have sold on Jan 1. Oh well, I'm not unhappy owning the stock at these levels, or even the LEAPs I bought over a year ago. By the time they expire in Ja'09, AAPL will have taken out the old highs (I hope), but even if not, at these levels they are still very profitable (just a whole lot less profitable than they were on Halloween).

[Barbarian]

deja vu... remember what happened when the first ipod came out
and most people after a good start called it a flop ?? including some very well known CEO's
when you have a vision and good marketing you might hit a few snags here and there but in the long run brilliant ideas are rewarded
Apple stock took about 1 year to double from Oct03 to Oct04

[Thomas Barta]

There are a lot of people who stand to make a lot of money by creating bizarre stories about "missing iPhones" and such to drive the stock down.

I wasn't born yesterday; I'm buying more AAPL.

[reagan]

I have never seen a stock take it on the chin so undeservling than Apple right now. I mean 130 right now is such a joke. I hate these f****** analysts......

[ballsschweaty]

those low hanging fruit are my balls.

[gofer]

Eventually, there's a price where AAPL will turn into a bargain, but it's not at 135. Today, this 'low hanging fruit' lost another 5 bucks.

[vicc1972]

Remember in August 2007 when AAPL was 112 and everyone would have you believe the sky was falling? In the 2 months that followed AAPL went as high as 189. The boo birds came out then and they are coming out again.

Those that are long on AAPL are all disappointed in the guidance that came from Oppenheimer but the reality is that he stayed consistent with the way he provides guidance. If anyone thinks that Oppenheimer wasn't aware that his stock would get battered on his guidance then think again. That's why he's the C-Level executive of a very influential global company.

What Apple did shows confidence on the part of Apple about it's future prospects. They are thinking forward and not worrying about the performance of their stock for a couple of days or weeks in the market.

As the saying goes: Control the things you can control.

[Thomas Barta]

"Today, this 'low hanging fruit' lost another 5 bucks."

The NASDAQ went down about 4%; AAPL about 2%. I think we're beginning to see some support-- for those of you who are technical types.

[reagan]

What's next, 120? 110? 100? I mean this is getting ridiculous.

[BlahBlah]

No, APPL was down 4% as well, not 2% and the NASDAQ was down 1.47% not 4%.

No, there's no support since it just blew through the 200MA - if needs to turn around by 120 or it's next support is 90

Apparently Apple fanatics and smart investors are not the same thing

[BlahBlah]

And for those of you who like to make money, you might want to read the comment by Long-Short Guy above

[SmartGuyStocks.com]

Low hanging fruit can always fall lower. Mo-mo stocks get hurt worst in a bear market. So, unless you are saying the bear is over, then AAPL is not a safe place for capital ...

[gofer]

u right, Blah123... I think I see now who the real 'technical types' are!

[Thomas Barta]

"No, APPL was down 4% as well, not 2% and the NASDAQ"

Sorry-- typing error on my part. I meant the gap between 2 and 4% was small-- AAPL wasn't dropping so fast.

[yet another steve]

What all you "seasoned" investors fail to mention is the possibility of a buyback. The company has $21/share in cash. Yes it has been crushed as a momentum stock... but at some level Apple will step in and put a floor under it. At these levels and with the cash they are generating they can easily do so.

Yes in the conference call they did not show any interest in a stock buyback. But that was at $155. I wouldn't be surprised if they wait for a nice oversold day and cut the press release authorizing the buyback. And they have the cash to really buy the shares and make it stick.

And when everyone expects it to still go lower in the short term... that's generally the bottom.

[Spike]

Looks like a similar situation at SNCR

[Missing fingers.]

The AAPL chart is a bubble chart like the tulip mania chart of the 1600s and the south sea trading company chart of the 1700s. Today we call these "momuntum stocks" but what we really mean is "mania stocks". They sell boutique cell phones and computers (which are both considered commodity devices) and we are entering a recession or worse. Gee, what to do. Hmmmm.

[Thomas Barta]

"bubble chart like the tulip mania chart of the 1600"

I expect that computers are not going out of fashion soon. Apple sells not because of form or color but because they deliver much more FUNCTIONALITY than the competition. With MSFT it's always--oh, version 3 will actually work. Which seems to work for secretaries and clerks, but for people who actually USE their computers, this is not a good situation!

[floatyerboat]

Since Bush appointees at the SEC changed the uptick rule in the summer of 07 the market didn't take long to assimilate to the short side trending we're experiencing. Surly the credit crisis is THE overriding cause for the bearishness but it stands to reason that facilitating shorts can't be
buoying prices. Hedge funds and the major financial houses are just pulling the trucks up to the front doors of retail novice investors who choose not to go on margin. Don't take my word for it, no less a market analyst than JOhn Bollinger has agreed. Do a search and read the editorializings about it. Its out there, it hurts. It shouldn't even be called Investing anynmore.