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  • Apple Losing Its Grip

    Apple, Inc. (NASDAQ:AAPL) continues its run of success both in its industry and on its upward trend in the market, claiming a greater share of the smartphone profit pie and continuing on with solid sales of its flagship iPhone line. The company's sales remain in expansionary territory and despite a shaky start for the Apple Watch-their first completely new product since the iPad-are poised to experience further success into the second half of 2015 and potentially onwards despite projected headwinds and weaker guidance. Nevertheless, increased profits and revenues combined with incredible cash flow and expanding margins make Apple a solid stock to own even though its strong position in the technology sector masks problematic elements and expectations of weaker hardware shipments.

    The Fundamental Picture

    Apple has slowly been increasing its share of total profits from global smartphone sales, which have risen from nearly 50% split with Samsung in 2013 to an impressive 93% of the operating profit share for the mobile market. Despite not owning the lion's share of units sold (which still belongs to Samsung), Apple's strategy of maintaining control over its pricing model, as well as focusing on the upper-end market has worked out fantastically for the company. Another major factor in their seemingly ever-expanding profits is their penetration into the Chinese smartphone market, which seems undeterred by the recent stock market crash. The introduction of the 6 line (with its bigger screen size) saw increased demand in the fastest growing smartphone market, even raising the average selling price of smartphones by over $40/unit. Apple is also highly successful at retaining customers, as well as attracting new consumers.

    Some investors are showing concerns over the fact that the iPhone has become too big of a life line for Apple, accounting for approximately 63% of its total revenues. The risk in this is that a single flop in terms of a new product release or a slowdown in the sales for the flagship product could severely impact share prices as well as the company's revenue stream. The latest earnings announcement provides some clarity that Apple is not in fact invincible, after company reported sales of 47.5 million iPhones, below guidance of 49.5-50.0 million units. Even though the number of units sold expanded by 35% versus the same period last year, sales of the device fell by 23% quarter over quarter as customers hold off on purchases ahead of the release of the next generation. On the positive side, the numbers indicate a growing share of the market for the company in the high-end mobile device field, with Samsung seemingly losing a big percentage (assisted by cuts in their supply chain), allowing for greater market penetration by Apple.

    Outside of mobile sales, Apple has also fallen short of sales guidance for its Mac laptop line selling 4.8 million units while the biggest problems were witnessed in tablet sales which have fallen for 6-straight quarters. Although unit sales came in-line with expectations at 10.9 million sold, the iPad continues to revenues plunge, experiencing a -23% annualized dip. Mac sales were not quite as problematic as the lack of adoption of the iPad in workplace, with computer sales rising 9% versus the broader PC market which is seeing deliveries contract. Watch sales have proved a contentious issue with analysts lamenting the fact that Apple does not intend to provide a breakdown of the number of unit sales. Right now, estimates are in the range of 1.8-2.0 units sold since launch, although nailing down the specifics is difficult with Apple combining the new hardware with other products such as Apple TV. Although the company beat internal projections according to CEO Tim Cook, limited roll outs and availability in only select locations makes the impact extraordinarily difficult to measure. While there seems to be a big drop-off in sales in the first year to 18 months post-release, analysts are predicting strong sales of the Apple watch (between 6 and 9 million for fiscal year 2015), a figure that should further boost confidence in Apple and its product diversity.

    The company has also shown itself to be on solid ground financially after seeing the cash hoard rise above $200 billion while announcing another dividend of $0.52, in line with previous disbursements. Apple's Free Cash Flow is currently at an astronomical $64.3 billion/year, allowing for both higher dividends, as well as a stronger buyback policy, have the potential to push the dividends distributed even higher. They have already decreased their outstanding shares by 700 million, with $200 billion approved for cash expenditures (both for buybacks and dividends) by March 2017. The company's revenues have also been solidly trending upward, with this quarter's revenue up 32.5% year over year. Apple's earnings share, while dropping from the previous quarter's $2.33, still managed to beat estimates by a small margin, printing at $1.85 per share. However, after released revenue guidance, the kneejerk reaction was to the downside, with shares retreating -6.82% in after-hours trading after losing -1.00% during the cash session. Shares are still trading higher year-to-date, gaining just under 10% following yesterday's post-earnings plunge, however, optimism looks to have been severely dented as guidance misses targets.

    The Price Outlook

    Yesterday's price action showed that one of Wall Street's favorite technology companies might finally be falling prey to its own hype. The strong capital position of the company and growing cash balance are indicative of a healthy company from a financial perspective, but in the high growth technology universe, weak guidance has paved the way for short-sellers and other naysayers to bolster their cases for a company that might have peaked. While not necessarily so considering the growth in smartphone deliveries, Apple's dependence on the iPhone means that successful new product launches are necessary for the company to maintain its momentum. The fact that the company chose not to release sales figures on the iWatch is somewhat troubling as the lack of transparency could insinuate problems, not success.

    While the market capitalization sits not far from highs, yesterday's announcement wiped away $60 billion in shareholder value and near-term and share prices could easily fall back towards the $105-110 range. The strategy of buy the dip could be promising, however, with the broader trends in the market, equally dangerous and risky. A deeper pullback might provide value investors with a better entry while income investors would find better yields, especially around $100 per share. With the weaker quarter ahead as far as smartphone deliveries, prices will likely continue to be battered until the new product releases are announced in the fall. Until then, holding Apple shares could be slightly hazardous until the company sees guidance improve and manages to beat analyst expectations.

    Jul 22 10:50 AM | Link | Comment!
  • Greece: The People Have Spoken

    As the day came for the Greek people to choose whether or not to accept the terms of a Eurozone savior package, it turned out that the Greek people voted "no" with an overwhelming majority. With over 60% of the Greek people disapproving of the terms their Eurozone partners have suggested, the Grexit appears to be more real than ever.

    In light of the democratic nature of the vote, France and Germany have banned together in asking Tsipras for some reasonable counter terms -- a clear sign that the Eurozone's main economic drivers aren't sure they want to let Greece go just yet. It seems they understand the repercussions of such a drastic measure, and that Greece's Tsipras and Varoufakis knew exactly what they were doing by sending the terms to their own people for a vote.

    It wasn't Me

    Greece's Syriza party is, by definition, a populist party. The entire platform was based on giving a broken nation what it wanted: the right to say "no." It appears that when the going got tough, the Syriza party just went back to the people. The people felt, by and large, that austerity measures were only oppressing them, rather than helping them become solvent as a country. Despite the feeling of the Greek people over the last few years, Greece's Eurozone partners have played the austerity song on repeat to little avail.

    Why no?

    Each round of funding has been accompanied by demands to cut retirement spending, government jobs, and government-backed social programs. This reduction in spending was supposed to help Greece reach solvency, but has neither been effective nor fully implemented. By voting "no", however, the Greek people are showing their unwillingness to comply with austerity demands. That really means that Greece would rather start printing its own new IOU currency than remain in the Eurozone and minimize government spending.

    New Money

    The need to introduce a new currency stems from the conditions upon which the European Central Bank is willing to issue euros to Greece. Without euros as a way to pay back current debts. With no other currency flow available, Tsipras and Varoufakis have to convince their lenders that the new currency is worth the risk of accepting. The risk aspects comes in receiving a currency you can't be sure will be useable or tradeable on foreign exchange markets. I can issue you a billion German marks today, but unless you're a collector of obsolete currencies, I'm just giving you a heavy pile of banknotes.

    What will happen to the euro?

    In the short term, the Eurozone will survive, if not outright improve, after Greece exits the currency union. Long-term effects are harder to accurately forecast, but speculation abounds. Ironically, the Eurzone partners who have tried so hard to keep Greece afloat may be hoping for its utter failure after a Grexit. Ideologically, the euro sells itself as the ultimate form of European peacekeeping and prosperity. If Greece does well, the entire concept of the euro will be undermined. In a few years, if Ireland or Portugal find themselves on the brink of Greek situation, they may just jump ship. For now, be sure to benefit from the cheap euros. Especially compared to the dollar, they are cheap and will remain cheap while Greece settles its referendum issues. It won't take long for the rest of the world to realize the the Eurozone can get on quite well without them. Then they'll be a good deal more valuable.

    Jul 07 7:39 AM | Link | Comment!
  • Twitter Tilting Lower

    Confidence in Twitter (NYSE:TWTR) is running low due to a lack of user and revenue growth with CEO Dick Costolo recently resigning after disappointing results over the last few years. Investors are wary of the stock despite cautious optimism brought about by the addition of new features meant to draw in new users, as well as increase the platform's efficiency in advertising. Twitter still faces an uphill battle in its monetization efforts, and is currently overshadowed by industry giants in advertising shares.

    The Fundamental Perspective

    Twitters' difficulty in engaging new users is well documented. Since Costolo began as CEO, the company's monthly active users (MAU) have grown sluggishly, especially when compared to competitor Facebook (NASDAQ:FB). Currently, Facebook has 1.44 billion users, with 800 million MAU. By Comparison, Twitter reached 308 million MAU in 2015, despite predictions by Costolo of explosive growth when he took over. Contrary to those forecasts, Twitter's growth has contracted in each of the past three years, with the platform adding only 16 million new MAU in the first quarter of 2015. The Company owns just 21% of the social media market. Despite a 90% aided brand awareness, most potential users who visit Twitter aren't converting into registered users. The company estimates that over 500 million people visit the site don't register for the service. There is a well-founded concern that Twitter has shown little recently in the way of growth catalysts. The platform's user interface remains a major obstacle in new user acquisition, and visitors find it hard to navigate it in order to find relevant content.

    The company's difficulty in growing its user-base has translated into a negative impact on advertising, an area that has already been a thorn in Twitter's side. Currently, the company's advertising revenues are still low compared to others in the industry. This year, Twitter owns only 3.7% of digital ad spending (Compared to Facebook's 24% and Google's 13.7%); numbers which are not expected to improve significantly in the next few years. Their advertising strategy has recently come under fire, as the company's pricing model, introduced over the previous two quarters has failed to translate to higher revenues or even a higher share of the advertising markets. Twitter's model of only charging advertisers for ads that lead to a desired interaction has backfired on them. Instead of drawing more advertisers and raising their market share, the model has resulted in less advertising revenue than expected, as well as less clicks. This, coupled with existing complaints about user experience problems with the platform as well as its lack of accessibility, have lead advertisers to be wary of twitter as a solid source of leads.

    Twitter's revenue for the most recent reporting period was also a source of disappointment for shareholders. The company reported $436 million in revenues in the first quarter, 74% higher year over year, but still well under analysts' estimates. The company seems to be tempering future expectations, providing guidance estimates for revenue of $470 to $485 million. Twitter's EPS currently stands at $-0.98 TTM with net income negative since listing publicly on the New York Stock Exchange and 1-year return for shares a dismal -11.59%. Based on the fact that the company has shown negative income for years and boasts a market capitalization of over $22.40 billion it is not hard to tell that shares are substantially overvalued despite the recent losses. In a sector that is filled with unicorn valuations, Twitter is among the publicly listed variety and without showing substantial revenue growth, short interest at 4.72% is only likely to grow over time. The most recent 52-week low of $33.51 is not far off and the next likely waystation for shares before declining further.

    There does seem to be some relief on the way for the company, in the form of new upgrades to the platform's user interface and user experience. The company's recent purchase of Periscope has allowed for easier video viewing. This also translates positively for advertisers, along with twitter's new auto-play feature for video content, which has already shown good results in terms of views and click through rates. Twitter has also been working on Project Lightning, a new front-page aggregator that will be able to show trending events and hashtags, eliminating the need for users to dig through tweets and content that is irrelevant. Finally, Twitter has made efforts to make their platform more advertiser-friendly, by designing a system that allows advertisers to have full pages to present their products (as opposed to 140 characters). These upgrades would indicate that Twitter could be in the beginning stages of a new surge over the longer-term, however, near-term prospects remain negative considering the valuation metrics and consistent losses.

    The Technical Take

    The weakened near-term fundamental outlook is corroborated by the technical indicators which show both the shorter and longer moving averages trending lower over time. The 50-day moving average crossing the 200-day moving average to the downside on June 1st is a very bearish sign, commonly referred to as the death cross which is usually accompanied by further losses in the financial instrument. In this particular case, since the startling losses at the end of April, Twitter shares have been trending lower over time in an equidistant channel pattern with a bearish bias. Yesterday's sharp uptick might be the perfect entry point for traders expecting more downside in the shares, with shares trending at the top of the channel at $36.23. A move below the lower channel line would be indicative of a downside breakout trade to be accompanied by additional transaction volume and momentum. A break below support at $33.51 would pave the way towards substantial losses in shares, with the next visible support at $32.02 and $29.33. With continued losses forecast, it is reasonable to reach these levels within months based on the current financial trajectory of the firm.

    (click to enlarge)

    Conclusion

    On the whole, Twitter is a popular service, but not growing at quite the pace seen in rivals. Without more of a focus on monetization, the company will likely to continue to hemorrhage money, meaning the hefty valuation of over $20 billion is completely unjustified, especially for a company with such a simple service. If Twitter can step up monetization efforts after the leadership transition there might be room for shares to grow modestly, but best case scenario, they stop falling as quickly as investors wake up to reality. Right now, all indications are for further losses considering slowing monthly active user momentum and limited upside from advertising. The low thirties and high twenties appear to be the next stop of one of Wall Street's favorite unicorns.

    Tags: TWTR
    Jul 01 12:44 PM | Link | Comment!
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