The Apple Confusion

Oct.17.12 | About: Apple Inc. (AAPL)

Back in the day, when people spoke English in full sentences, face to face, without the intermediary of a cell phone or computer or telephone, an argument of particular strength was often called a "confusion."

And right now there is a big "confusion" going on about Apple (NASDAQ:AAPL). By the end of last week it was pretty much known - excuse me, I thought it was pretty much known - that Apple would introduce an iPad mini on October 23rd. A quick Google of "iPad mini" and dozens of articles discussing features and price points popped up. Yesterday the company made it official - yes, there will be an announcement and event on October 23rd, product unspecified - and the stock moved up fifteen bucks.

Am I missing something here? Or does this mean the most widely held stock is not really being followed by professionals, analysts and individuals? The answer is yes - too many people owning the stock or even recommending the stock are not watching the company. A pity for traders, great for investors.

Why the distinction?

If you sold calls (as I did) against an Apple position assuming the world had digested the iPad mini announcement and date, you are now scrambling to roll that position given the sharp movement in the stock. My bad - I should have assumed, as I usually do, that most of the people on the Street are woefully ignorant of the companies underlying the stocks they own, discuss and recommend.

If you are an investor, this ignorance is great and supports the stock price - is currently determining the stock price - which is half of what it should be. Not a few percentage points below where it should be, fifty percent where it should be. Yup - my price target has $1,200 as the target price and I actually believe it could be $1,400.


Just compare AAPL to other S&P 500 companies - look at profits, then look at growth rates for the past twelve quarters in revenues and profits, then look at upside catalysts and project future growth rates for revenues and profits, then look at how investors are valuing other large caps with the same growth rates. Sorry, you cannot do that - none has those growth rates - none has growth rates half of Apple's.

The Apple bears - and they must be traders or people who bet the Houston Astros would win the World Series - argue this growth is not sustainable. Really?

  • Apple may have the pre-eminent brand in cell phones, and the best smart phone on the market, and is having trouble meeting demand for the iPhone 5, but the company's overall market share in the cell phone market is below 4%.
  • The Apple Mac family is the premium brand among mass market desktop and laptop computers, commanding prices often twice that of competitors - and is the only product picking up share in a declining PC market (see Intel's (NASDAQ:INTC) recent earnings announcement) and yet it still has, by my calculations, less than 5% of the worldwide desktop and laptop market.
  • The Apple iPad is dominant - totally dominant, 65%-85% share - in the tablet market. That market is growing more than 50% a year. That being said, if you bundle low end laptops and netbooks with tablets - as many market research types do - Apple still has a relatively small share of that market, perhaps under 20%.
  • And here is a kicker - the largest cell phone carrier in the world, China Mobile (NYSE:CHL), 640 million or so subscribers, does not yet carry the iPhone, "yet" being the key word here.
  • How about another kicker for the short term - ChangeWave Research (part of the 451 Group) surveys show pent up demand for the iPhone 5 is by far the greatest they have seen for any iPhone. This means a terrific calendar Q4 and Q1.

The strenuous arguments against Apple are no more than a "confusion," a creation of those who want to be heard for the sake of being heard, traders looking at very short term movements and headlines. Investors take heart - Apple, the second most valuable brand on earth, is, to my mind, the closest thing to a sure thing, in the real world, as I have ever seen in my career. And over time the stock should follow.

Disclosure: I own a great many shares of Apple, this position constitutes roughly one third of my liquid net worth.