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Aerospace engineer who is seeking to learn as much about investing as possible in hopes of one day managing more than just my own money.
  • Apple's Problems Are Mounting 2 comments
    Jan 29, 2013 2:59 PM | about stocks: AMZN, CRM, LNKD, MSFT, XOM, AAPL

    Based on current market sentiment, Apple (NASDAQ:AAPL) clearly has troubling issues that are unlikely to be overcome anytime soon. A cursory glance over the latest earnings report should be enough to scare even the staunchest Apple bull. While earnings came in slightly above expectations, the second highest quarterly earnings in any company's history were not enough to support Apple's still bloated market cap, sending it back down below the company that not coincidentally holds the record, Exxon Mobile (NYSE:XOM), which regains its rightful place in the top spot because it obviously operates in a market that is much more conducive to high margins and growth and thus deserves a higher multiple.

    Apple's admittedly stellar results were probably inflated by a holiday season that saw the company make desperation moves like release an iPad Mini that is sure to lower margins and cannibalize their current product lineup. Earnings and margins were clearly still too high and thus have nowhere to go from here but down, especially when the company is forced to release a lower priced phone to compete with omnipresent Android devices. A scary revenue miss of half a percent from what omnipotent analysts were predicting clearly portends the coming earnings dropoff and is a harbinger of doom for Apple's dominance of the already saturated smartphone market.

    A more troubling development was the increase of Apple's cash holdings, which grew to $137B, or almost a third of its market cap. This is clearly too much cash for one company to hold, so it wouldn't surprise me to see it forced to repatriate the cash that is held overseas to help solve the debt ceiling issue. Also, the current dividend is too low, or too high, depending on who you ask. With a payout ratio of only 25%, this dividend can only rise, signaling their end as an innovative technology company and transition to obsolete zombie like, gasp, Microsoft (NASDAQ:MSFT), doomed to flat earnings for all eternity.

    Another potential problem is the company's growing exposure to the fickle Chinese economy and its rising consumer class. These newly minted, upwardly mobile, savvy spenders would never be swayed by a tarnished brand name like Apple and clearly prefer the products of regional players like Samsung, since they admire and identify with this fellow emerging country much more than stodgy old American culture.

    In case you couldn't tell, this statement and the rest of this article is thinly veiled sarcasm, aimed to illustrate the irrationality of a market that eschews current earnings for the prospect of supposed future earnings of companies that are perceived as still innovative, like say an Amazon (NASDAQ:AMZN), (NYSE:CRM), or LinkedIn (NYSE:LNKD), which keep coming up with new and creative ways to lose money yet report growing earnings through non-GAAP gyrations.

    This flies in the face of traditional valuation methods like discounted cash flow analysis, which states future earnings should be less valuable, because of inflation and the opportunity to earn compounded earnings, and thus must be discounted to the present to arrive at an intrinsic value for the company. If we perform this exercise on Amazon, we have to make some wildly optimistic assumptions to arrive at a valuation anywhere close to where it is currently trading. The opposite is true of Apple, where earnings would have to drop off a cliff to yield an intrinsic value below where the company is valued.

    Even though the market is currently telling me I'm dead wrong, I think I'll stick to my value investing guns and wait out the irrationality inherent in the market currently. Could this irrationality continue? Absolutely, and rationality is a huge investment handicap when investing at the tail end of a bull market, but I'll have to grin and bear it while collecting my Apple dividend and watching its earnings continue to stack up.

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)
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  • Micro Magic
    , contributor
    Comments (59) | Send Message
    If you hadn't admitted that your article was a farce, SA would have posted it as an editor's choice article. Meanwhile, AMZN reports slowing sales, no earnings and no overseas plan . . . which all results in a new high price in after hours trading. I see how monkeys beat investors. Doing math and due diligence is a waste of time with any horizon of less than a decade. Its all a fashion show with more and more players having a time horizon in days instead of years..
    30 Jan 2013, 12:18 AM Reply Like
  • Illuminati Investments
    , contributor
    Comments (9111) | Send Message
    Author’s reply » I was just thinking that after seeing Amazon's "earnings". Lower earnings, lower revenue, but wait, operating margins (non-GAAP, of course) are rising from 2% to 3%. Wake me up when they approach Apple's "disappointing" margins, which they never will. Until their margins increase, all the revenues in the world won't matter, which by the way they still have less than a third of Apple's sales.
    30 Jan 2013, 12:37 AM Reply Like
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