Six Reasons Why Apple's Still a Buy 24 comments
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Monday's Gartner report that showed weakness in the smart phone market failed to identify the elephant in the room that the 3G iPhone wasn't even available in Q2. Instead of identifying this principal reason for the slower smart phone growth numbers, Gartner offered up a misleading conclusion,
"The current economic environment continues to negatively impact the market, limiting consumer spending and replacement purchases in general."
What should have been said is that all competitors to the iPhone are seeing their growth rates diminished. It seems like everyone within the industry is trying to find alternative excuses for their bad performance, they just can't come out and say that it's because of the iPhone. 
As an investor, you must understand this fact. After the misleading Gartner report the market sold off Apple (AAPL) with the rest of the smart phone group in a practice that has become all too common in 2008-throwing the baby out with the bath water.
Lone Peak Asset Management (lonepeakportfolios.com) has officially put Apple on our conviction buy list. The current consensus on this stock can be summed up by two recent articles. The first, written by Jim Goldman of CNBC infers that this stock is suffering fatigue because of too much hype. Goldman, who is a long time Apple bull, wonders if the company is a victim of its own success. The second article, written by Jim Cramer, states that Apple is in a bear market and will be for some time. We strongly disagree. This is not the time to be jumping from the stock, it is the time to be buying for its seasonal run. Here are the catalysts:
1) The Steve Jobs health debate is coming to an end.
2) Investors have figured out that the P/E method of valuing Apple stock is not accurate. Accuracy will be restored as investors focus on P/Free Cash Flow (link).
3) Seasonality is on Apple's side. For the past three years, Apple stock has averaged a 45% return between now and the holidays. This is Apple's time to break through the $200 barrier.
4) International iPhone sales will be boosted from distribution deals in Russia and China. The iPhone will replace laptop computers in many emerging markets.
5) Microsoft (MSFT) will continue to lose market share to Apple (link). Mac sales could reach 3 million in the current quarter.
6) Apple's new game plan of gaining market share over margins (link) will begin to play itself out after Tuesday's event. This company is at a positive tipping point.
The best time to buy Apple is when sentiment is contained. We are in one of those moments. Don't be a seller when you should be a buyer.
Disclosure: Long AAPL
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This article has 24 comments:
On this last note - I visited an Apple Store in a mall last week during midday on a weekday. It seemed to be the only place that was transacting any business. Curiously, it seemed to be a lot of middle-aged people. I suspect the college student potential customers transact online. I will keep checking through the buildup to the holiday season, but my suspicion is that it will build up to Thanksgiving week and then full on pop.
Ditto the AT&T store. Go at noon or 5pm and you are practically guaranteed a 15-30 minute wait due to the length of iPhone activations (the streamlined process will be a real improvement when that arrives). Again, Apple is one of the few brands generating any consistent, widespread, and robust excitement in the current economic times.
My last point - I've read a lot of soapbox economic analysis about how Apple is tied to the overall economy, even more so because it's expensive, and about how the credit crisis will affect it as much or more than Dell for instance. It is my belief that this is WRONG and fundamentally ignores: (1) the distribution of wealth in this country and who are Apple consumers - ie they're not the people losing their jobs; (2) the appeal of Apple's products, and not only to Apple faithful; and (3) convergence in action.
I'm gonna be greedy while others are fearful.
But like Google, the stock is a victim of it's own success. When Apple hit $200 there was a question of where do we go from here. The sad fact is, Apple was, is, and will be suffering from multiple contraction. Will the stock hit $300? Definitely. But it will coincide with the P/E ratio being like 22 to 25 times earnings which still isn't that shabby.
I agree with your point - basically.
However - as pointed out - sooner or later people need to realize that simple PE is not an accurate model for Apple because of all the deferred revenue. Additionally, as it continues to grow rapidly, people will come back to paying a premium for it. The problem now is not ONLY that there is the bear effect you mention, but people are uncertain how the Republican Recession is going to play out with Apple.
And on top of all that, there is the "decreasing margin" issue. eople talk about Apple sacrificing margin for volume, but I think this is an oversimplification. Yes, they are sacrificing some margin - but I think they are doing so more to bring a new product out at a really good price and that the margin sacrifice will be small (Dell would die to have Apple's "lowered" margin).
When all the numbers are out, however, people will see that Apple is in great shape and growing like a hot startup.
----
A parting shoot. Apple is one of the few companies out there where management (NOT only Steve Jobs!) does not run it for the short-term stock price. They go out there and try to build the best quality, most innovative products that are beautiful both inside and outside. This dedication to quality is what has driven their success, and will continue to do so.
IMHO
I'll drink the Apple kool-aid any day. Show me ONE MSFT product that stands on it's MERITS vs Apple offerings? Xbox? Well, Apple doesn't compete there, and that division is perpetually in the red.
jegan ;-)
What I find reassuring most of the time at conferences like today, is how much better, if incrementally so, the products get. The new iPods look great, just tried the new iTunes and it's once again a nice upgrade, genius sidebar is fast and informative and new visualizer needs to be seen. The new headphones look like a huge seller these holidays as well. Looking forward to the iPhone bug fix update on Friday.
I would have liked to see new laptops or some new products and updates of everything, but all in due time, I'm sure.
As far as the hedge fund comment, Goldman said Jobs mentioned that he thought some hedge fund was short AAPL in JUNE and was spreading rumors that his cancer returned. The minute it hit the air, the stock, already in decline, nosedived. So yes, I'm sure shorts are working this stock and they will continue to question Jobs' health and emphasize negatives and publish obituaries and feed FUD to the media. Bear market, economy, no uptick rule and no enforcement make the environment ideal for short-sellers. I do wish however that he would not make these comments without calling names.
I have no idea when the stock will turn is this vicious bear market, but it's obvious that Jobs is not getting worse and is enthusiastic as ever. He assures that he is in good health. This product refresh tells me that people at Apple are having fun and the product ecosystem keeps expanding. I will look forward to new products and another great quarter and the year.
just doen't jive. Remove your blinders and question all assumptions rather than following the crowd.
I'm accumulating over the next couple of years. Important point to consider: MSFT still controls about 90% of the OS market. The most likely scenario is that in 10 years, all of it will be OS X.
"The Steve Jobs health debate is coming to an end."
Really? Didn't he still look pretty thin to you? Sure, he says he's healthy - what do you expect him to say? This is a man, and a company, that apparently didn't think a diagnosis of pancreatic cancer was material to investors until he actually had surgery. I'm not saying he's sick, and I am not and never will be short AAPL, but saying "the Steve Jobs health debate is coming to an end" is simply irresponsible.
"Investors have figured out that the P/E method of valuing Apple stock is not accurate. Accuracy will be restored as investors focus on P/Free Cash Flow."
If they've figured it out, why isn't the pricing "accurate" already?
"Seasonality is on Apple's side. For the past three years, Apple stock has averaged a 45% return between now and the holidays. This is Apple's time to break through the $200 barrier."
Were any of the product updates in the last three years as anemic as this one was? And if this seasonality is predictable, how long do you think it will be before the market neutralizes it?
"Microsoft (MSFT) will continue to lose market share to Apple. Mac sales could reach 3 million in the current quarter."
You said these were catalysts. Do you know what a catalyst is?
"Apple's new game plan of gaining market share over margins will begin to play itself out after Tuesday's event. This company is at a positive tipping point."
Why didn't you write that the new iPods "struck a cord...across the country" as you did about Sarah Palin's speech less than 8 hours after it was over, before any of those businesses had even opened? When will you see how damaged your credibility is from unabashed cheerleading?
"The best time to buy Apple is when sentiment is contained."
As opposed to, I don't know, EVERY OTHER STOCK?
Some other news was very impressive. 100M apps downloaded in 60 days. Certainly many were free but that is still a huge number. 8.5M songs on line in the catalog. Another huge number. HD video for sale to view on your computer or Apple TV. Combined these are the rumblings of the next wave. Apple may not be the winner in this but they are certainly in their fighting hard. The iPhone and Apps Store in particular are laying the groundwork for a huge future business.
However, neither of those translates into billions of dollars in revenue next quarter so that news didn't drive the stock price (IMHO).
yeah, time to buy, whatever
I'm also looking forward to October's hardware product announcements. I believe Apple is smart to break up the announcements and roll outs.
Apple has 4 thriving businesses: iPods; Computers; Software & Content distribution; iPhones
There are companies that are successful with just one of these lines. Apple is successful and highly profitable in ALL of these endeavors, owns 2 of the markets, and is on it's way to owning another.
There is no company that is comparable to Apple at this time; you would have to combine Microsoft, RIM, Amazon, HP, Dell, Nintendo, & Creative all in one, to have a company that even comes close to compare in what Apple is doing right now as a single efficient & profitable company. This is simply amazing, IMO.
Apple is highly undervalued and is a Strong Buy.
Honestly, I am more concerned about Phil Shiller's obesity. :-)
Jobs will never gain weight, remember, part of the operation's side affect is like having your stomach stapled. Personally, I wish I was as thin as Jobs. (Research "Whipple Operation")
The economy and market will never recover until we get over our own fears and pessimism.
Actually, that's one reason I like Apple as a company; in an economy that other companies are selling off factories, consolidating, and firing, Apple is buying, building, and hiring. They have doubled their RD spending. They are not running scared, and their company bottom line shows the results.
most movies are made using Macs/software and computers in movies are usually Macs with the good guys; Ap in Washington added imacs to their desks last year; students are buying Apple laptops in droves; it just goes on and on and on the 13th Apple opens 3 more stores just in the U.S. This isn't a risk for them. apple stores have the most profitable space, foot by foot, than any other retail business.
students buy a lot online, but they are in the stores on the weekends and evenings playing with the stuff, asking the staff questions and taking advanced courses.
i'm long appl and staying there. this is a financially sound company (a big deal these days!!) and has a huge moat, complete with dragons.
Interestingly, Jobs' relative weight continues to mirror that of the iPod. They better not keep making that thing smaller...
Reminds of the "Run on the Bank" scene in Mary Poppins. :-)
Let me help you be positive; the facts are, Apple is undervalued as a stock. Unsubstantiated fears & uncertainty, induced by short sellers, is what is driving the stock down. Instead of being fearful, and selling, this is a time to be thankful, and buy at great price. As it drops, buy more. Apple is a solid world wide company, no debt, great products, that has INCREASED it's sales and revenue during a downturn economy. Impressive. This stock slide is a gift for long term investors, and will help nudge "emotional" investors out of the market.
Once the "emotional" investors are out, short sellers will begin to lose, as reality begin to win out. Short sellers will then flip the script, buying options and real paper. As all the good news comes out, "emotional" buyers will again enter the market, buying as well. Once this happens, Apple stock will grow very rapidly, almost over night. Only those that stayed in the stock will benefit.
How do we know this? It all happened before. I've heard a lot of investors lament on not buying Apple the last several times it went through this cycle. Oh well.
When will this apple stock Tsunami occur? Historically, during the holidays and months afterward. However, with the election creating it's own market weather, it's hard to say if that will be true this time.... mark my words, though, it will occur.
After the election, depending on the candidate's economic policies-
Grow economy through tax cuts & government spending cuts vs. grow government with tax increases- Apple may add another stimulus; buy back stock. If they do this, it will lock in the price, and further cause a stock moon increase. Apple will NOT do this, however, until they know the economy in general is stable. They want to keep all that cash at their disposal to continue to weather the economic roller coaster. After the election, IF the new powers that be, lock into a pro economic growth policy, this will occur. However, if they lock into a pro-government policy, don't count on it.
Actually, the market in general hinges on this last point... we shall see. Apple, as an individual company, however, will continue to outperform, regardless of the election outcome.
Remember, volatility is always caused by two things: 1.) Fear- real or imagined 2.) Those that manipulate that fear in order to profit
In the case of Apple, it's all really a no brainer. The history & numbers don't lie, and rational investors are sticking with it.
Are you ready for The Perfect Storm?
I picked up some AAPL yesterday and will buy more if it retreats farther.