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  • 7 Sound Reasons Apple Will Go Up, Up, Up In 2014 0 comments
    Oct 1, 2013 7:59 PM | about stocks: AAPL, GOOG, TSLA, FB, LNKD

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    Apple Inc. (NASDAQ:AAPL) is currently receiving scrutiny from the media and public because of its poor performance so far this year. The loyalty of Apple product consumers appears to be low, and the public seems to be turning to Android-based products. This is not true in any form or fashion. Apple reached a premature peak in 2012, which excited the market and investors. Now that Apple is not performing as well, investors have lost confidence. This is an unfortunate mistake. The company could not possibly replicate last year's performance this year and is now being criticized for not being innovative enough. Fortunately for the intelligent investor, this will allow more entry points during these blasphemous times.

    Apple is Undervalued

    Media coverage in 2013 has cast a shadow on Apple. The coverage has led the public to believe that the company is losing popularity, although Apple is a strong company with very strong fundamentals and a massive bank-roll to back its company model. Apple is not attempting to keep up with Google Inc. (NASDAQ:GOOG) or any other popular tech choice. It is just establishing its market presence by matching product releases of more popular companies (at least, currently) like Google and Samsung.

    The problem with consumer-based tech companies is hidden in the details. These companies are solely driven by fads, tech junkies and media popularity. The problem is, these companies rise and fall at such a rapid rate that it is sometimes hard to distinguish the difference between garbage and true fundamental value. The best way to examine Apple's future as an investment is to examine the fundamentals, so let's take a look.

    Currently, we see a yearly performance of -28.45%, and -6.04% YTD. This is typically the biggest focus of most investors looking for perspective on non-calculated growth. Then we see that the current estimate for next year is 8.85%, which isn't too shabby but seems extremely low for Apple. Next we note the current trend by reading the EPS Q/Q, which is -19.8%. All of these figures are the main focus for typical investors, which they use as indicators for long-term investments. Unfortunately, this is wrong. We shoud take note of Apple's excellent P/E rating of 12.25 and its PEG of 0.69. The current P/E and PEG shows that Apple has plenty of room for growth and improved EPS Q/Q as well as yearly performance. This growth likely will not occur all at once during 2013, although in 2014 we will see Apple in a different light. When you compare the company's quarterly statistics, you find an interesting trend that counteracts the motion of the current security.

    Looking at the chart above, you can see that Apple is not producing that much less revenue than last year. Despite Q1 results, which show Apple at its peak, Apple has remained consistent with its revenue trend. It is averaging 162% in total revenue compared to cost of revenue, and its costs remain low, showing that it is keeping consistent with its expenses.

    If you look at the average of investments to operating cash you will find a positive trend. Since Q4 of 2012, Apple has increased its long-term investments by 67%, showing diversity and growth. This also shows an excellent representation of strength. Now, if you compare the net income to total liabilities, you will find that Apple is increasing its net income quarterly at a significantly higher rate than its liabilities. Apple has increased its net income 19% above its liabilities since Q1, once again showing strong fundamental growth.

    Seven Strong Reasons to Provide Investors With a Catalyst

    1. Ratings analysts are completely confused on how to rate Apple. Since Aug. 2, seven different companies have issued ratings on Apple, yet none of them have downgraded Apple to "sell." Analysts know that the current fundamentals Apple is supporting are strong enough to exceed media trends, although they do not want to predict whether it should be an "outperform" or a "buy." The one thing all rating analysts have in common is that they have all upgraded Apple's target valuation to the mid-$500 range from the $400 range. This represents strong encouragement to long-term EPS value.
    2. Renowned investor Carl Icahn has increased his ownership of Apple, which was announced in September. Directly after, the stock surged 7%. I am sure Icahn has the right idea. He said that investing in Apple is "a no brainer," which I believe to be 100% true. Icahn also said that a "big buyback" would be a "major plus" for the company. This shows a very strong point of view that investors should take into consideration. If Apple made a huge buyback, it would heavily affect the stock, as Icahn noted.
    3. Do you really think that Apple thought the release of the Iphone 5S and 5C would be a cure to the phone war? No. Apple is trying to produce items in order to show competition, which is part of its overall strategy. Apple knew that by making a slightly more expensive and slightly less expensive version of the Iphone 5, it would create appeal for the China Mobile deal. Most analysts are worried that Apple miscalculated the value of the phone versus the cost of subsidies, though in hindsight Apple used a very smart strategy to having the deal accepted. Apple more than likely anticipated that everyone would be let down by the value of the two new version of the Iphone 5, yet since it is slightly cheaper and has more customer appeal because of its multiple colors, it is sure to be a favorite. Therefore, Apple has produced a product that China Mobile will be able to offer at a reasonable price to its consumers while China Mobile eats the subsidies of the phone cost, forcing immediate income from China Mobile's massive consumer base.
    4. I know everyone forgets from time to time, but Apple does sell more than Iphones. Apple has an extremely strong product line, and it is very niche-driven. Apple updates its product lines every year, and loyal Mac consumers, new college students and recent graduates are constantly buying them. Not to mention, the new and revised Ipad will be released soon, which always makes an impact in the consumer technology market.
    5. If you follow Apple technical trends, Apple consistently performs well at the beginning of the fall and spring semesters. Given Apple's wide variety of products, this ensures consistent annual sales growth from new college students and graduates.
    6. The fundamentals for Apple are really all you need to ensure positive long-term growth. Unlike other PC and tablet production companies, Apple is a noted name. Apple products provide a unique user interface that is desired by millions. A typical consumer looking for an android based tablet or windows based computer has thousands of different choices. A consumer looking for an Apple-based interface has only one choice, which ensures consistent sales. You also have to consider the amount of Windows and Android tablet users who migrate to the Apple interface after seeing that their unique interfaces, compared to Apple users migrating from the Apple interface to Android and Windows interfaces. This ensures Apple will have continuous strong revenue growth and reduced cost of revenue.
    7. Apple has a billion-dollar budget and a secret vault full of innovative ideas. Apple will always be an innovator; just because the company has shown a lack of innovation in recent development does not mean it has lost its creative flow. Apple establishes near perfect standards for its extremely loyal consumer base; it also ensures that whatever it innovates takes years to surpass. Apple is far more likely to release the next big thing long before competitors. This is reason enough to take long-term risk on purchasing shares during a bad performance year, as things will only continue to grow due to fundamental strength.


    Given the blessing of Icahn, I suggest a very strong long position. Everyone has his own perspective, though I believe this to be the best possible trade for limiting your downside and maximizing your upside. This strategy works for both April 2014 options and mini options. In this example, I am not including the cost of commissions. I recommend buying April $480 CALLs, which are currently priced at $4,365 per contract. I also recommend sell-to-open April 2014 $500 PUTs, which currently pay a premium of $4,955. This will create a risk reversal, allowing you to use the premium from the sell-to-open PUT to pay for the bullish call. You will also make an additional $590 from the premium. With this position in Apple you are decreasing your risk to 0%; if the options expire worthless, you still have made $590 off the premium. My target price is based on Q1 performance from previous years, allowing confidence to predict that Apple will hit a price target of $544 per share between now and April 2014. If this occurs by April 2014, you will have a minimum profit of $6,990 after exercising the CALL options, which would be 75% ROI based on tied-up buying power. You can also use the same strategy with MINI options to produce a 13% ROI. This currently has an average probability of 48.30% of occurring between now and April 2014.


    Regardless of the media's opinion, Apple is a very strong company fundamentally. If you are not an options investor, then I would recommend going long after the Q4 report for 2013. Apple is a sound investment for the long term. I expect the Q4 report to be very dull with nothing too impressive, though I believe the Q1 report for 2014 will be excellent. This company has an immense amount of outlets that generate high profits and that can change the direction of yearly performance very quickly. Keep in mind the seven strong reasons that provide a catalyst for investor when deciding to include Apple in your portfolio. It was only less than a year ago that Apple was over $700; this will occur again in the next five years.

    Disclosure: I am long AAPL, GOOG.

    Additional disclosure: Dear SeekingAlpha Followers:If you would like for me to cover any companies, I would be more than happy too. Please just private message me with any questions, also check us out on our website. @NeWorldResearch

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