Dare I hang myself out to dry via the comment section by writing about Apple (AAPL)? I might not be so brave if I hadn't read the annual letter that David Einhorn writes to the partners of his fund, Greenlight Capital.
Mr. Market is only just beginning to pay attention to a few recent and relatively significant pieces of news. They are...
- The response by Apple's legal team to the Department of Justice's antitrust suit
- The news that broke Wednesday morning that Chinese regulators had approved Apple device "model number A1430," which is most likely the New iPad
- The Letter to Partners written by David Einhorn's Greenlight Capital
- There are also some smaller stories that have popped up recently. Let's look at these pieces of news one by one.
Click on the hyperlink near each piece of information to view the source articles.
#1: "Apple to DOJ: Bite Me"
While an antitrust lawsuit filed against a company that you own is generally cause for concern, the letter filed by Apple's legal team and the accompanying commentary in the article linked above should offer investors some relief. The lawsuit concerns allegations that Apple conspired with publishing companies to fix prices when it was creating its eBook business prior to the launch of the iPad. The author writes...
I haven't had so much fun reading legal documents since the Watergate trials.
But what makes Apple's response, filed Tuesday, such a great read is the clarity and precision with which it cuts the government's case to shreds.
The key paragraph of the legal filing, even for someone relatively foreign to legalese, makes it relatively clear that the case against Apple is thin even if there is a solid case against the publishing companies.
The Government starts from the false premise that an eBooks "market" was characterized by "robust price competition" prior to Apple's entry. This ignores a simple and incontrovertible fact: before 2010, there was no real competition, there was only Amazon. At the time Apple entered the market, Amazon sold nearly nine out of every ten eBooks, and its power over price and product selection was nearly absolute. Apple's entry spurred tremendous growth in eBook titles, range and variety of offerings, sales, and improved quality of the eBook reading experience. This is evidence of a dynamic, competitive market. These inconvenient facts are ignored in the Complaint. Instead, the Government focuses on increased prices for a handful of titles. The Complaint does not allege that all eBook prices, or even most eBook prices, increased after Apple entered the market.
If you're interested, you can download the full legal filing at the end of the article linked above.
In case you don't feel like reading the whole article (or WSJ.com won't let you view the key bits), here they are...
According to China's Telecommunication Equipment Certification Center, an Apple device with third-generation, high-speed wireless data capabilities has been issued the license needed for the company to begin sales in China.
The device, listed as "model number A1430" is compatible with the 3G standard wide band code division multiple access, or WCDMA. The language used by the regulator suggests that the device is the new iPad, which has yet to launch in China. Vendors often begin selling new devices within weeks of network access licenses being granted.
While the wi-fi only version of the New iPad was approved by regulators in late March, the product has not yet been introduced to the Chinese market.
If you have not read Einhorn's letter and you have a vested interest in Apple, long or short, I highly suggest you do. Einhorn has shown himself to be uniquely aware of what seems plain to him but is not obvious to the market enough times to warrant even the most staunch Apple bears taking his words seriously. Most recently, Einhorn set his sights on Green Mountain Coffee Roasters, (GMCR) focusing on patent expiration-related headwinds and egregious accounting 'irregularities' in the financials, among other things. Shares have fallen considerably since his presentation.
So what does he have to say about Apple? You can read the letter in its entirety by clicking on the link in the header. Here are some highlights (cherry-picked for brevity), which include Einhorn directly addressing common criticism of Apple valuations.
In 2011, Apple's revenue grew by 66% and earnings per share grew by 78%. Nonetheless, its stock appreciated by only 25%. As a result of this mismatch, Apple's P/E multiple compressed by about one third.
Some see the stock surge as a bubble, while others go as far as to mock that Apple is its own asset class.
Too many hedge funds own Apple. Collectively, hedge funds currently hold less than 5% of AAPL's shares outstanding.
Everyone knows there can be no such thing as a $1 trillion company. We can't find any prohibition on trillion dollar market capitalizations.
All empires must fall. This concern, while not as arbitrary as the first two, reinforces our belief that the skeptics have a fundamental misunderstanding of Apple. Their view suggests that AAPL is a hardware company. We disagree.
Apple can't possibly maintain its hyper-growth trajectory. Apple shares are not priced for growth. Its current valuation is justified without [hyper-growth]. Despite its size, Apple remains one of the most misunderstood stocks in the market. Apple is a software company. The value comes from iOS, the App store, iTunes and iCloud. Once the user has a second device, AAPL has captured the customer. The high switching cost makes Apple's business much more defensible than that of its predecessors.
We continue to hold Apple. Not only do we think the skeptics are misguided, we believe the shares remain cheap. A below-market [P/E] multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks Apple as below average.
Other bits of Apple news
Another fun little tidbit of news is that, according to Mary Meeker's Internet Trends Report, the App Store is now seeing 46M+ downloads per day (which means almost 17 billion downloads each year).
Walter Isaacson's biography of Steve Jobs pretty clearly alluded to Apple plans for (or at least Jobs' vision for) an 'integrated' television. In a 5/3/12 interview (which you can watch by clicking the link above), Isaacson mentioned leaving certain details about the Apple TV out of the book because "Apple hadn't had a chance to do it yet." Though the interview is almost a month old, I mention it in the context of this next bit of news.
Apple CEO Tim Cook took the stage for an interview at the D: All Things Digital conference Tuesday evening. While we've heard rumors of a drastically reinvented Apple TV pretty consistently since around the time that Isaacson's Jobs biography was released it hasn't been until very recently that the company itself has really offered much comment. That's beginning to change. Cook said that Apple has "some incredible things coming out." Though Cook remained as tight-lipped about the company's plans as usual, it won't stop us from reading into every word. Regarding a reinvented Apple TV...
Mr. Cook dodged the question as he has in the past, highlighting the growth of Apple's existing $99 Apple TV box. Mr. Cook called the device, which is still a relatively niche product, "an area of intense interest for us."
Cook also noted that in 2011 Apple sold 2.8 million Apple TV devices. But in just the first 6 months of 2012 the company has already sold 2.7 million. Interesting. Cook also noted that even after sales of Macintosh computers have grown faster than the rest of the market, he believes the tablet market will eventually surpass the PC market.
In an article published by Reuters, Apple is reported to have recently sought out an agreement with Epix, a streaming service backed by Viacom (VIAB, VIA). Since this is one of the content providers that Netflix relies on, this could be a move by Apple towards independence from Netflix in the area of content distribution. Time will tell.
What does all of this mean?
Despite a sea of red, shares of Apple traded higher by 1.21% on Wednesday, closing just 82-cents shy of the highs for day at $579.17. In fact shares moved higher just about all session long, though I should add that the volume was slightly below average. Shares stayed largely flat during Thursday's trading session, falling only .25% on slightly below average volume. Apple has traded higher over the past 8 sessions by almost 9% while the Nasdaq Composite has climbed less than 2% over the same period.
Apple is back in the news and the news is positive. We are now under 2 months away from the next earnings release, new product (Apple TV) rumors are cycling and many are also expecting iPhone 5 by late summer.
My opinion is that, barring some significant macro complications, Apple is ready to move higher from here as the P/E begins to reflect the real earnings growth, the market digests this recent positive news and speculation of new and updated products increases.
Disclosure: I am long AAPL.
Additional disclosure: I also own AAPL call options.