Apple in the Bargain Bin

Tumultuous turmoil in the marketplace has left traders and investors on a selling spree as the US Financial crisis spreads through the credit markets and begins to lurk in the nooks and crannies of Main Street economy. While several incredibly leveraged and debt-ridden names deserve to go under, other great companies are just being swept into the maelstrom of negativity. Apple (AAPL) is surely one of those names.

Granted, Apple was and may still be a high P/E stock, and as markets contracted of late, Apple's multiples have moved in kind, despite the company's growth outlook. The supplementing downgrades near this latest bottom offer a hope that this is a bargain basement price for this still solid growth company. When analysts start piling up the downgrades like Morgan Stanley and RBC did against Apple on Monday, during the Market's worst point loss, it's time to reconsider that this may in fact be a bottom.

Coupled with the White House push to get some sort of Bailout Plan passed through Congress and you've got a recipe for a potentially big turnaround. Let's take a quick look at the Apple "downgrades". The RBC analyst cut his Mac sales estimate from 3.0Million to 2.9Million units, which all things considered is still a stunning sales pace when a year ago the company shipped just over 2.1Million Macs. iPhones sales estimates? RBC actually rose those from 5Million units to 6Million units in the quarter.

As the 3rd iPhone rollout begins, which in early October should include Russia, there is very little, if any, doubt now that Apple will blow past its own goal of selling 10Million iPhones this year. It's also poised to be a 10Million Mac year, which of course will be a record for the company, not to mention the 10+Million iPods shipped every 3 months. With Apple holding an iPod event earlier this month to announce new Nanos and reduced pricing on iPod Touches, the company wants to place itself within a comfortable range of consumer spending, even as that spending starts to deteriorate.

While it's true a new computer favorite with consumers is the "net-book", the small-screened sub-$500 machines for the budget-conscious shopper on the go, even as Apple gets more mainstream with its computer business it is still a premium niche design brand. Tiffany's (TIF) doesn't suddenly start selling cubic zirconia, does it? Brand recognition and popularity, especially among the youth market, is critical to businesses in a consumer downturn and Apple has it. All signs earlier in the quarter have pointed to a record back-to-school shopping season despite economic perils. Not to mention Apple's own claims of margin-cutting new devices coming soon, which likely include either lower priced entry laptops or the ever-rumored Tablet device.

The iPhone is the next big growth phase for Apple. As iPod users upgrade / replace existing iPods with new models or iPhones, the company will continue to see the incremental revenue from not only those device sales, their booming iTunes online music business, but now also from the sharply growing Application download business. The latter provided $30Million in revenue on its first 100Million downloads in the first two months of operation.

As Apple's quarter comes to a close, earnings are right around the corner, and as always analysts will be looking towards guidance more than anything. This is where Apple's biggest problem may be. Given the current economic climate, Apple's typical lowered and comfortable guidance may hurt more now than it would help later. The important thing to remember with Apple's upcoming results is that its future is sound, with tens of billions in cash and deferred revenue from iPhone sales the company isn't looking at any debt, has the flexibility to still innovate and negotiate tough economic climates, especially as it captures the press in another "Steve-note" later in October to unveil new lowered price MacBook and MacBook Pro laptops (as the rumors go).

But consider this. After this quarter, cumulative iPhone sales will likely be close to 11Million units, and at $400/device on average (pre-subsidy) that's close to $4.5Billion in revenue of which an eighth will show up on this quarter's books; $550Million. When you consider a year ago Apple had total sales of $6.2Billion for the quarter, the iPhone piece is becoming ever more significant. And when investors think about the additional $4Billion that will be padding Apple's cash hoard in the upcoming quarters, it will certainly make them breathe easy even in the most crimped economic spending scenarios.

Apple's cheap, it's a steal, and there are very real catalysts in the next few months (Earnings, Mac Event, Christmas Sales, MacWorld, Christmas earnings). This is a stock that could climb 50-60% from here in the next half-year.

Disclosure: Author is long AAPL

Comments

[kris23:]

Apple's a steal right now. Everyone else may be panicking, but I think its a good time to look at stocks (like APPL) and recognize the value at a time like this.

2008 Sep 30 03:18 PM

[marketlovin...:]

Yea, I gulped and bought a few shares yesterday. That took some severe courage. I hope that stupidity wasn't disguised as courage.

LOL, oh well, I hope I don't have to puke them up later.

2008 Sep 30 03:57 PM

[Murphy Mac:]

I bought first thing this morning. I've bought all over the map. As low as $15, as high as $170. And several places in between.

I believe Apple is one of those companies you look back at and say, "If only I'd gone with my gut and bought. I knew they were onto something..."

I'm a true long. They are executing well, bringing diversified businesses together vertically. aapl has a lot going for it.

2008 Sep 30 04:06 PM

[Tom B:]

AAPL's current P/E is NOTHING for a growth tech stock. I bought on yesterday's dip. The Macintosh represents less than 10% of the computer market in the US. A smaller percentage overseas. People are NOT going to give up buying computers. Nor is MSFT going to suddenly figure out how to make an acceptable OS. Thus, the future looks bright for Apple.

2008 Sep 30 04:12 PM

[ecgoing:]

Disclosure please. Do you own AAPL?

2008 Sep 30 04:17 PM

[Brad Ferris:]

Apple is about to learn a very important lesson that many before have learnt the hard way. You don't reduce margins in an effort to spur demand for your product in a market that's already matured.

They were better as a company that offered niche products and could therefore charge a much higher margin for them. Now what they're doing is matching competition margins for similar products and expecting to have the same sales growth as before?

You NEVER compete on price. It's the last thing you do. If demand dries up either you're not making a product that people want or they simply don't have the discretionary spending to afford it.

Now Apple does make some great products, but the consumer is tapped out at the moment and lowering their margins is akin to suicide. Motorola tried it and failed, McDonald's learnt their lesson in the early part of this decade and Apple will be no different.

Over the long-term it might be a fine investment, but its certainly not dirt cheap as the market is pricing it accordingly to how the margins will express their future earnings potential.

2008 Sep 30 04:28 PM

[User 233726:]

The lowering of margins is result of new products, thus need to recover development costs. Also this is season for back to school purchases which normally are the cheaper computers, thus lower margins. Apple did say they would be introducing a new product that the others could not compete with. This may mean something like the rumor of a computer with no keyboard, thus lower costs.

2008 Sep 30 04:45 PM

[sanjayk:]

Read this it previews the oct 14 event, i think that will be helpful because that event will give us a sense of where the company wants to go...
cybertelegraph.blogspo...

2008 Sep 30 05:03 PM

[jameso99:]

What About Steve Jobs. What if he is sick. He looks terrible??

2008 Sep 30 06:33 PM

[uncle:]

I think even more significant is not where AAPL's P/E is today but rather its forward cash flow. When the analysts figure out that the real AAPL story lies in cash flow and not their P/E (due to AAPL's goofy accounting for the iPhone) they will see a company trading at 9x - 10x forward cash flow and we should see the stock priced accordingly.

2008 Oct 01 08:41 AM

[Chris Kraso...:]

Disclosure: Author is long AAPL.
It was included in my original article first published on the WC Power Tech Fund Investment Blog

2008 Oct 01 01:30 PM

[Andy Cole:]

Apple could be a steal at this current price.

2008 Oct 01 02:19 PM

[Apple at 60$:]

any body got any updates on the talks between apple and China mobile? IF the talks go through the stock will not only go back up but i will hit new record high.

2008 Oct 01 02:23 PM

[anti-momentum:]

hedge funds own a bunch of this stuff; it will keep going down for a little while they continue dumping stuff through end of year due to redemptions. Yes, a good company, but watch out for those hedge fund massive selloffs!!!! POT, PBR hit too, but they will keep dropping for same reason. They ride the train up, then get off the train as soon as it turns a corner...

2008 Oct 02 06:10 PM