Buy Apple into Earnings

The US bear market has affected dozens of companies, many in the financial sector. US consumers have seen their disposable income decreased substantially and they are unable to refinance their homes to get some needed relief as the mortgage market has tightened. Inflation with respect to energy has really hurt commuters as we have seen gas prices shoot through the roof, and they have had no other option but to trade in their SUVs and squeeze their two kids and family dog into a Prius.

This doesn't mean short everything, but I am seeing a change in the market that is somewhat confusing. Citigroup (C) and Merrill Lynch (MER) came in with earnings and still had substantial write downs but not apocalyptic by any means. Microsoft (MSFT) and Google (GOOG) didn't do as well as many thought but that was on the heels of IBM (IBM) having another good quarter. The selloff in the Nasdaq Friday seems to be a little too much as I do not believe that things are as bad as many think.

We are just starting to see the tapering off of oil prices and it is looking like a downward trend could continue for some time. With all of the commotion, many have forgotten some of the best companies that have consistently outperformed the market. My holdings in Potash (POT) and Monsanto (MON) are starting to look good from an earnings standpoint, but now I will be taking a position ahead of Apple's (AAPL) earnings.

AAPL is not just a great company with one of the biggest fan clubs in the world, it also just seems to do things that others deem impossible and it makes the computers the world thinks are cool. The "cool" factor is something you can't buy or mimic, it is just something you have.

I went to Best Buy (BBY) last week to take a look at a new computer as mine is so slow now I cuss more than I type, but AAPL had a huge setup with tons of people looking at their laptops and desktops. It is obvious the HPs (HPQ) and Dells (DELL) of the world are just bowing before them. When speaking with the sales staff, they didn't even want to bother with the other companies and kept directing me towards the new Apple that with a little VM software could do everything, even let my dog out in the morning if I slept in.

Is all the hype warranted? I believe so, and I am going to put my money where my mouth is as earnings on Monday will probably be spectacular.

When looking at AAPL, I am not dismissing the effect the iPod Touch and iPhone have had, but look at this as just the beginning of their halo effect on computer sales. I own an iPod Touch and currently hook it up through a wireless network that allows me to hear all of the baseball games over the internet while I mow my lawn. I know it sounds like a little thing, but it keeps me busy on many an uneventful weekend afternoon. These little enjoyable things are not just a want, at least for me, but a need. I cannot do without this technology, and since I have an iPod I will probably buy an Apple as my next computer, to replace my existing Compaq (now you have an idea how old it is).

If you want to follow PC sales, one first needs to follow Gartner (IT) as it is the guru of guru's with respect to this area. On July 16th it was reported that AAPL is now the third largest PC vendor in the US. Only 60,000 units separate it rom Acer, but that is a far cry from last year's numbers. The market share gains are phenomenal with respect to sales even though the percentage does not seem that large.

AAPL now has 8.5% of the US market, but when growth in this area is measured for the company, sales are up 38% year over year. Market share is up 2.1% year over year with respect to the entire US market. To give an idea of how much Apple can grow, Dell has four times the US shipments as AAPL currently has. Also, global shipments of PCs are up 16% year over year. The IDC has the numbers for Apple shipments lower than Gartner, but either way the numbers still look good. Robust growth in the sector was seen in the EMEA. There was some slowing in Asian markets, mostly in Japan. The US has also slowed, but that was expected.

There were an estimated 2.37 million Macs shipped worldwide. Look for numbers to be substantially higher than the street expects as this stock has taken its breather. The 3G iPhone will also help sales, and I believe that many of the contractual situations will be lifted somewhat in order to get the product out to more consumers, increasing revenue.

The main reason to be excited and buy this stock into earnings has more to do with performance. The company has beaten estimates for so many quarters in a row that it is hard to keep track. It will probably offer a conservative guidance, but look for something new over the horizon. The fact that Apple stores are empty with respect to iPhones is a little worrisome, but it gives an investor an opportunity to buy. Look for net income to come in over $1 billion and for earnings to be in the $1.25 area. This stock is headed to $200.

Disclosure: Long AAPL.

Comments

[Oh Blah Dee...:]

RE: "The fact that Apple stores are empty with respect to iPhones is a little worrisome, ... "

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In today's world of manufacturing, "supply" can ALWAYS be addressed, and Apple will address the iPhone supply issue as it ramps up the iPhone manufacturing line. Everyone who wants an iPhone will eventually get one. Apple has to make sure that iPhone manufacturing proceeds with product quality, fit, finish, ample support in place.

"DEMAND" is what companies NEED, and Apple has this in spades for its products. People who can't immediately get an iPhone, because it is out of stock, will NOT settle and buy another manufacturer's mobile phone. The Apple iPhone cannot just be replaced with another manufacturer's mobile phone. Even "smart phones" are not in the same class as the iPhone.

If you think iPhone demand is high now compared to iPhone supply, wait until iPhone sales start later this year with the remaining 50 countries that ALREADY have signed iPhone distribution agreements with Apple.

Apple must know that demand for the iPhone greatly exceeds supply at this time. That must be why Apple had to phase in the first 20 countries and then the remaining 50 countries to distribute the iPhone.

"You ain't seen nothing yet." China and Russia will probably sign iPhone agreements with Apple later this year or in early 2009, for another BIG jump in iPhone DEMAND.

2008 Jul 20 10:21 AM

[mollytjm:]

my local (king of prussia) Apple store is restocking iphones almost daily, but they just fly out off the shelves...and yet... the stores remain jammed because people are buying the other stuff. we've seen almost nothing yet..this is the tip of the iceberg. Apple is gaining on so many fronts and in so many places around the globe, and, with no real debt and huge $ reserves.. i just can't see a downside.

it's a huge company now with so many brilliant people and huge R & D staff... and THEY ALL focus on innovation. what's killed other tech stars, is that they developed something and then sort of stopped, resting on their laurals.
their next products just weren't much better or even different. That's not Apple!

2008 Jul 20 11:04 AM

[Neil Anderson:]

What's happening at Apple is phenomenal. Tip of the iceberg indeed. We're along for the ride in an exciting time of history in the making.

2008 Jul 20 01:16 PM

[Bradh2o:]

The aforementioned comments are spot on as well as the main story its referenced to, BUT as we watch declining economies, you know its going to have an impact.

I've always been an Apple person... presently I have a MacBook 2.4 GHz and an iMac 2.4 GHz. I'm extremely happy with Apple's OSX and machines.

Personally, I waited patiently for the iPhone 3G, for better features and allow Apple to work out the bugs, plus I assumed the price would drop.

I opted out of the iPhone 3G, why...?

Because AT&T Wireless increased the data rate plan by 60% (dropped the inclusive 200 text messages at the previous $20 per month data rate plan, causing an additional $5 per month for texting and $10 per month increase in data rate plan = $35 per month), an additional $180 per annum in fees.

Current manufacturing costs (pegged well below $100 per unit) don't support a $180 subsidy, that goes on forever...

Those of you who adopt the iPhone 3G, I'm happy for you.

But... I'm feeling what is happening in the economy, and adjusted accordingly... went to HD Only with Dish, as savings of $280 per annum, dropped AT&T Long Distance and now use Skype, as savings of $600 per annum, etc, etc, etc...

My thoughts were, just get my hands on a 1st generation iPhone, but given its popularity, and resale value, given it still qualifies for AT&T's old $20 plan, I don't see than happening in my future... MY Moto V3 is just going to have to suffice (I don't use internet service on my V3, anyway).

Cheers to Apple, not so for AT&T Wireless, and their Land Line Services'...

2008 Jul 20 02:07 PM

[Bradh2o:]

Oh, and there's one more thin I forgot to add...

very important...

NO 3G service where I live, even though AT&T has said it would be here 3 years ago.

After AT&T's acquisition of Bell South, capitol improvements have seemed to have taken a back seat...

I can't justify the iPhone 3G service plan, a.) when there's no 3G service where I live, b.) when it's known the 3G service really drains the battery (even Pogue and peers have recommended disabling the 3G feature on the iPhone, in effect, doubling battery life on the iPhone 3G).

2008 Jul 20 02:20 PM

[Toni:]

70% of probabiliy AAPL will go down after earnings.

2008 Jul 20 03:33 PM

[Toni:]

"will probably be spectacular."

Almost forgot: They are real, and they are spectacular. (cit.)

2008 Jul 20 03:57 PM

[Mark Sigal:]

Specific to the halo effect reference, I have written a post that speaks to the WHAT and WHY in business terms:

Holy Sh-t! Apple's Halo Effect
thenetworkgarden.com/w...

Check it out if interested.

Mark

2008 Jul 20 04:46 PM

[Robcal1:]

@Bradh2o: I agree with you about AT&T with regard to their service. It really is horrible. I live in Anaheim, CA. which is just a 30 minute drive south of L.A. (the 2nd most populous city in the U.S.). I've owned both the original and now the new iPhone and the service continues to be an absolute joke! I consistently have no bars or no service anytime I'm at home. If I drive around my area, the service comes and goes. I will keep the iPhone and put up with this ridiculous service since I spend most of my time away from home where their service is ok at best. By the way, Apple has issued me a full $400 refund for my original iPhone. Apple is well aware of exactly how bad AT&T's service really is, one CSR told me that they've issued a lot of refunds because of AT&T. Apple puts up with it because no other cell company will give them such a large subsidy for selling their products, thus allowing them to sell the iPhone for $199 and $299. And they expect us customers to tolerate it, which for the most part, we will.

2008 Jul 20 07:40 PM

[brewer:]

It may go down after earnings. Don't be an idiot and sell though, because once this is over, it will climb and climb. I'll never forget last fall, it was doing several percent per day, incredible.

2008 Jul 21 10:10 AM

[Toni +:]

Sorry, I was right. It seem I cannot avoid that.

Well, more cheap share for me.

Probably a fast turnaround in the next days tough, after a "digestion" period.

2008 Jul 21 05:32 PM

[JW, PhD:]

And more bad English from Toni "the Tool" Saccofshit. Learn to write and spell, or stay off the internet.

2008 Jul 21 05:44 PM

[Toni +:]

JW, burn too much ?

Urusai, kono bakayaro, kusu o taberu na.

2008 Jul 21 06:40 PM

[JW, PhD:]

Speak English, Toni. Even an idiot like you should be able to do that much.

2008 Jul 21 06:41 PM

[Toni +:]

It's good people like you exist: blind, brainless, full of themselves idiots!

"Ben, I'll enjoy watching you lose money on your AAPL short."

signed by JW, PhD.

seekingalpha.com/artic...

2008 Jul 21 07:16 PM

[JW, PhD:]

Toni = Idiot.

signed by JW, PhD.

2008 Jul 21 07:21 PM

[Toni +:]

JW, how can you be always wrong ?

"Ben, I'll enjoy watching you lose money on your AAPL short."

Did you enjoy it ? Idiot ?

AAPL around 150, by the way.

You are THE pure idiot. The reference blueprint.

2008 Jul 28 06:35 PM