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Troy Jensen is Chief Executive Officer and Managing Director of nxVenture Capital, a rapidly-growing and innovative Private Equity Management Firm based in New York City. As well as overseeing the firm’s global operations, he is the Managing Director and head of the Investment Committee. Jensen... More
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  • Apple's Q4 Climb To New Highs – An Exclusive Source's AAPL Buy Strategy (Part 1of 3) 0 comments
    Jul 8, 2013 2:51 PM | about stocks: GOOG, HPQ, YHOO, AAPL

    Ah, yes. It's the end of a long Fourth of July holiday weekend - 2013's halftime break if you will. And what a 2013 it has been thus far; even with the recent turbulence the markets have done very well. While I do think we all were a little too excited at the markets first half scorecard, with several market commentators trumpeting 2013's first half performance as "the best since 1998"…um, not quite. That blanket quote takes a lot of selective reasoning; three times since 1998 NASDAQ has had a better first half than 2013. But indeed, it was the S&P 500's best performance since 1998, so let's not quibble. The blue chip Dow Jones Industrial Average is up 14% in the first half of 2013, while the Nasdaq and the S&P 500 each increased 13% (I cannot write an article advocating a strong BUY on Apple shares and ignore the fun fact that Apple (NASDAQ: AAPL)was the single largest drag on the S&P 500's first half performance; if we were to exclude Apple from the S&P 500, it would have experienced an even healthier almost 16% gain…it had to be mentioned). Several of Apple's primary competitors are also performing well through the halfway mark of 2013 - Google (NASDAQ: GOOG) is up 21% in CY 2013 and Hewlett Packard (NYSE: HPQ) is up a whopping 68.96% since the beginning of 2013.

    Apple Lost its Innovation Somewhere Inside the Googleplex…Large Reward if Found!

    So as we look at Calendar Year 2013 (CY 2013), the question almost every investor has whether they own Apple shares or not is universal: "What's NEXT? We all await, but our patience is reaching threshold limits!" That quote would apply to consumers, investors, analysts, Industry competitors, and the wider Digital Media and Mobile Industry segments as well. Apple is such a giant, integral part of the Digital Media and Mobile marketplace, there are a LOT of people watching, waiting, reading the rumor sites and articles, and wondering why the company that seemed to produce PURE MAGIC every two years has gone…oh, well, not that I say that, it has been two years since Apple's last major new product release stormed the consumer marketplace with the iPad Mini. Can that be true, it seems like it has been ten years, not two?

    My commentary is tongue-in-cheek obviously and is pointedly making everyone remember that while yes, these past two years have truly been different; Apple is in actuality not even 5% off its historic New Product release cycle. Let's quickly check illustrate that statement with the charts below:

    Apple New Product Release versus Stock Price Chart 1

    (click to enlarge)Apple New Product Launches versus Stock Price 2

    So Apple indeed may not have let Innovation escape the building through an open door, letting it find its widely reported new home in Mountain View (other reports have Innovation running off as far away as South Korea - however, there have been no sightings of Innovation in the Redmond, Washington area reported at all…). So if we at minimum just give Apple the benefit of the doubt, and assume that they will indeed have a new product release in early CY Q4 (not a new product update not the release of a next-generation product - I wanted to stress that I wrote "brand-new product release")…then what are the other insurmountable problems facing Apple? Why are high-profile analysts writing off Apple so quickly? As an aside, I love to bring those same analysts and industry experts their predictive quotes and posts from just 10-18 months ago…no one was close to writing off Apple then - some of the biggest Apple Bears were Stampeding Apple Bulls 18 short months ago (the highlight of an article next week that is sure to get me a lot more awareness simply by the SCORCHING retorts calling me a lot of ugly things…I love My Haters, but I am a Realist here to say it like it is - sucks that your TechCrunch top article of February 2012 called for a second "Apple Decade"…and less than two years later another article in VentureBeat has this particular "expert" singing a whole new tune - "Apple has had its day; I think of Apple as Microsoft, and by the end of the decade, we all might just be remembering an Apple that once was a big deal." WOW - this Industry expert has had MAJOR revelations regarding the current state of both the Industry as well as Apple itself. He MUST know something we don't - it says right there in that little bio he is a longtime "expert" in the Industry. OR…perhaps my man (to be named in the article next week) was simply wrong to say the entire decade belonged to Apple, and is just as wrong is now saying Apple may not survive the decade.

    Apple's Lost Year - Fiscal Year 2013…

    I'm taking up some space in my article to make an important point regarding Apple's decline from September 2012 - that in my analysis and models that account for various qualitative data sets to be weighed in, this decline was largely behavioral driven rather than purely analytical. I'll write it for all to see - I call BS on all the analysts who discount the behavioral POV (Point-of-View) behind Apple's very steep and sudden decline, and claim their analysis is very much based on Insert Useless Supplier Data Here or dismiss me with the classic "our analytical models along with human research - all conducted to an analytical call that then incited the market behavior." Sure…but, one thing: investor behavior and sentiment move the markets with far more force and velocity than quantitative data and analytic models more investor sentiment.

    For example: Are you telling me Apple lost 40% - nearly HALF the share value over 10 months (with - of its company valuation based on a decline in gross margins (NYSE:GM) several percentage points? Because after a 15-years of unprecedented financial performance - in fact so extraordinary, there is no precedent to compare Apple to in the history of recorded commerce* - that the company's financial and share price performance will continue to increase in perpetuity? and increase by ever-increasing rates in perpetuity? OR, if we look at many major companies that had a decade-long run of strong performance (again, nothing relative to compare to Apple has ever happened, but I've got compelling examples that are similar and relevant)

    In brief, Steve Jobs died, Tim Cook is no Steve Jobs, Apple was in the beginning of their standard two-year cycle where no brand-new products are historically released, and Apple Investors are spooked, as are seasoned Wall Street Analysts and Industry "Experts"…and of course, consumers. The media feeds on those emotive reactions, and when you research media sentiment like us with very strong marketing backgrounds do a million times for every client campaign, I found some pretty incredible trends that absolutely augment by POV - Apple's decline is an emotional reaction more than a major decline based on company fundamentals. Heck, the company was King of the Entire world less than a year ago. Empires can and do crumble, but not in 9-1/2 months!

    (click to enlarge)Apple APPL Investors Sentiment vs Stock Price - Infographic and Chart

    THAT SAID, I will now address some very real and very concerning and substantive issues weighing on Apple that, if they go unaddressed or worse, are addressed in the wrong strategic manner entirely, then the company may indeed find itself in a slow, steady, grinding decline the rest of this decade.

    · Gross Margins are showing clear signs of rapid erosion, falling from near 50% in 2011 down to last quarter's 37.5%. Additionally, company management guidance indicated guidance of 36.0%-37.0% in FY Q4 2013.

    o While many are predicting a fall over the course of the next 18-24 months to firmly stabilize at 25% - I emphatically disagree, in fact I cannot even understand the reasoning behind this estimate no matter how many times I read its justification!

    o I am very certain we will see some slight continued slide in GM though CY 2013 before new product introductions and CRUCIALLY, very high-margin ancillary revenue streams begin to scale rapidly in conjunction with the new product and software releases coming in Q4 2013

    · Lack of Obsessive Commitment to Innovation and Predictive Consumer Demand Talent are clearly not at the unmatchable levels they were when Steve Jobs was still firmly in control as CEO. I agree with many sources close to the company, as well as many analysts and industry reporters and experts that Jonathan Ive will be a tremendous asset in helping both hardware and software development at Apple regain that extraordinary edge Apple had to itself via Steve Jobs

    · Apple needs to address emerging markets with a inexpensive down-market iPhone entry (with the requisite cheaper retail pricing)…in tomorrow's article we will be discussing this product and more, but our sources have indicated they are much closer to being launched than the vast majority of analysts are estimating - late Q4 2013 is the current hard-target goal.

    o Apple is going to great lengths attempting to maintain the highest possible gross margins on these new down-market iPhones with much more inexpensive materials, as well as last-gen chips, etc…

    o Consumers in China specifically will eat these cheaper iPhones alive. Our sources say they are very much being designed with an "Asian Look and Feel" - like loud multiple colors to choose from, more attention to pre-loaded eclectic ringtones so common throughout Southeast Asia, etc.

    o This down-market iPhone will be available in the US late Q1 2014 - but the most fascinating part of my most reliable source is a planned full product introduction in China, with the very first "iPhone Lights" arriving in the company's China-based Apple Stores…we love the strategy, there is a lot of embracing China events coinciding we understand with the product launch…

    · iCloud needs help…and this was a domestic source with independent validation big news of this past week. Apple has several ongoing plans in place that will conclude in a two-step, DRAMATIC overhaul for iCloud.

    o Step One will be completed by the end of CY 2013, and is being executed by a dedicated, hand-picked internal team at Apple with many highly-sought industry talents proficient in Cloud builds having been hired - there is a definite dedication internally we may not see but I am hearing about in detail…

    o Step Two involves one of 2-3 target acquisitions Apple is planning on announcing in CY Q1 2014 - these are very strategic M&A acquisitions (yes, the word is multiple) designed to inject fantastic new capabilities with extremely high levels of innovation...Apple realizes it needs real technology transfer of core cloud, internet services, and social skills into the company.

    o Apple has definitive plans to dramatically scale-up their iCloud offerings and infrastructure in Q3/Q4 2014, adding what one source said "an exceptionally large amount of new capacity, to be brought online as the second half of 2014 moves forward."

    o Our source and our source's entire team (very involved in several vendor-specific areas for the iCloud infrastructure - all we know) is convinced based on what they hear that this is related to more than just iCloud expansion plans - this massive amount of capacity would denote a new, very large and "very intensive, high-bandwidth capacity with the best-in-class programming to handle variable bandwidth environment.

    o I am convinced based on some of the tech specs I was able to review and my own long background in Digital Media and streaming digital video content that it is vast additional capacity and new delivery tech for streaming Digital Media Content…" iTunes Radio dramatically expanded (more Spotify-Like offering?) Apple TV media content? Both I feel are likely…

    o It also has several particular technologies I was not completely revealed to me that pointed towards a Social Media Cloud-based solution - Twitter rumors abound…

    o Two ideas he mentioned that BOTH very specifically aligned directly with our overseas sources information on their iCloud activities were some type of Social Media Platform or large amounts of new streaming audio and video content.

    · Internet Services: This has received some attention quite a bit over the last few months on blogs and in the press and it deserves to. As the battle between mobile OS's continues to heat up over the coming years, rolling out amazing Internet Services will become more important, not less. Apple is again taking a go slow and grind it out approach to these. MobileMe didn't work. We'll learn from that. Apple Maps didn't work doesn't work yet, but it is getting there as of late. We'll learn from that. The thinking seems to be internally: we don't need to be first to market with great services; we just need to get to market. Sadly though, consumers seem to be getting more and more impatient in waiting around for Apple. Google was never perfect out of the blocks with their Web Services but they do seem to be on a roll lately. Apple does need more external talent with these skills injected into the organization. Yahoo (NASDAQ: YHOO) could be a great fit and Marissa Mayer would be an ideal head of an Apple Mobile Web Services. Yahoo! Mail, Flickr, Yahoo! Maps and their core properties would fit very well into prominent positioning in iOS. As Mayer has been saying of late, the Yahoo! properties map on very well to the top 10 list of activities of what people do most on mobile.

    · Social Media: We are absolutely touching on Twitter later in the series, but the biggest - one source says the only - challenge left in the on and off informal talks between Apple and Twitter relate to company culture. Apple and Cook in particular need to convince Twitter this is a special type of merger - the value-add Twitter could bring to Apple is literally infinite - core integration between iOS and Twitter's entire Social Graph and raw Big Data unfiltered Twitter streams could lead to…infinite possibilities. It would force Facebook back on their heels immediately, and Wall Street would go crazy for the deal.

    · Apple Needs to do several Acquisitions in the next 6-12 months: Apple needs to both prove it can actually conduct a very large high-profile M&A Event (almost all past small acquisitions were absorbed and disbanded, leading to the team they "Acqui-hired" bailing as well - they have gotten little tangible value from their acquisitions; they also absolutely need a major M&A Event to add value quickly to the company and the stock price.

    · Apple Needs to Look Aggressively at "Against-the-Grain" type strategies - Think Retail, which the company was universally ridiculed for when they launched the first Apple Store, and now they are universally copied by other consumer electronics companies - that will put it into the First Mover category again. This time however, they must move fast - The Velocity of Innovation has increased dramatically over the past ten years - and that means many times acquisitions.

    · Manage their free cash reserves carefully: I am not a fan - let me rephrase, I believe they are throwing WAY too much cash from the war chest back to investors. They need to stay incredibly focused as they were under Jobs against investor calls for increases in cash reserves being allocated to investors. They have done FAR MORE than I had ever thought or hoped they would…intelligent investors now the REAL value of that pile of cash was in strategic acquisitions and the ability to quickly scale just about anything they purchase or build themselves…the real value was in acquiring innovation capacity and execution infrastructure. Let us all hope that was the absolute end to any more increases in dividends and buybacks…

    More On the Trending Top Negative Issue Apple Faces - Gross Margins

    Here is a FANTASTIC article by a fellow writer at Seeking Alpha (due to unspecified compliance issues, he chooses to remain anonymous) that demonstrates what several senior analysts at my company's partners firms, a Private Equity Fund and an exclusive Wealth Management Firm, showed me just weeks ago that there are indeed several other factors outside of JUST competitive pressures that are impacting Apple's gross margins, and to both my sharp eyes, as well as a group of analysts that oversee $900 million in investment capital, think that Apple has not really even started the sacrificing of margins to increase their market competitiveness.

    From my fellow writer at Seeking Alpha - "Apple: Gross Margin Declines Are Primarily Due To Warranty Accruals And Depreciation And Amortization"

    Top of Form

    May 16, 2013 - By Elephant Analytics

    Changes in Apple's gross margins are largely due to increases in warranty accrual and depreciation and amortization. Apple's actual product margins (excluding those items) have gone down slightly with the introduction of new products, but that only accounts for 2.5% of the 6.95% decrease (36% of the total decrease) in gross margin from FY 2012 to Q2 FY 2013. That means that competitive pressures such as competition from Samsung and the introduction of lower-priced products such as the iPad Mini have not forced Apple to sacrifice margins anywhere close to as much as it seemed. The sacrifice of margins to increase competitiveness may happen in the future, but Apple has not gone down that path yet. Hence, further major decreases in gross margin are not anticipated at this point in time.

    Depreciation and amortization is expected to remain at current or higher levels for a while as Apple continues to purchase new property, plant and equipment. However, the effect of depreciation and amortization on gross margin is mitigated in high-revenue quarters since it is a non-variable cost, which should allow Apple to come close to 40% gross margins during those quarters, even allow for reduced margins on new products.

    There is also some upside in gross margin if the warranty accrual rate is decreased. Actual warranty claims versus the accrual is something to monitor in future quarters, as it seems that Apple may be overestimating warranty claims on the new products. Even allowing for recent changes in warranty policies, there may be a 0.5% upside in gross margin due to future reductions in the warranty accrual rate.

    Apple's gross margins are likely to remain in the 36-40% range for the foreseeable future, assuming a regular stream of new product introductions that have margins reasonably in line with current products.

    AAPL Price Performance Summary

    Apple closed on Friday, July 5, 2013 at US$417.42…down 40.8% from the stock's 52-week high of US$705.07, which the stock price reached just 288 days ago, on September of last year. Since hitting their 52-week low of US$385.10 on April 19, 2013, AAPL saw a nice rally after their lackluster last earnings announcement. Why? In my analysis that rally simply stemmed from underlying growth in positive investor sentiment; undoubtedly Wall Street's delight in the announcement of Apple's debt issuance plans (the company's first corporate debt issuance since 1996) played a key role as well. Apple's share price spiked to US$464.97 on May 7, 2013, leading Forbes to write an article about "The Real Reasons Apple's Stock is on a Roll" just two days prior to the May 7th peak. May saw stability in the share price, and there was cause for optimism…until the "June Gloom" arrived. June marked the beginning of yet another ugly march back down through the US$400 technical share price point, which AAPL broke on June 27.

    After May's brief respite from the "Doom & Gloom" Apple coverage, The media "Doom & Gloom" crowd was again at high volume and with a vengeance in June (our marketing agency charted the sentiment again for us and the end of June was around roughly 82% "Negative or Trending Negative" media sentiment. Apple was mired in negative sentiment based on concerns about slowing sales growth and declining profitability - declining gross margins and the infinite speculative reasons behind Apple's GM intricacies (most were very off-base) were being discussed everywhere.

    And here we sit going into July - last week was good to Apple, but AAPL is trading up just 8.39% from its 52-week low (as of Friday's close)...and that is while my smile grows bigger as I type. I took advantage of Friday, June 28th's dip to $391 - was a fantastic new entry point opportunity as the stock was getting beat up from all sides and the markets had one ugly volatile week as well (cheers China and Bernanke!). For the record, before I get into the second half predictive analysis largely based on key and historically very reliable sources, this is where we stand as the markets open tomorrow on AAPL:

    • AAPL as of last Friday's close is up just 8.39% from the 52-week low less than 90-days ago…
    • The stock is down almost 41% from its 52-week high of $705.07 on September 21, 2012
    • AAPL is down 31.56% in the past 365 days (past year)
    • AAPL is down 20.79% for the past six months (183 days)
    • FY 2013 opened with AAPL trading at US$667.10
    • As of Friday's closing price, Apple shares are now down -38.5% for FY 2013, with roughly 3 months left this last FY Q4 to shrink that number…

    Click Here To Review AAPL 1 year (YTD) Performance Chart (via Google Finance)

    Click Here To Review AAPL 6-Month (YTD) Performance Chart (via Google Finance)

    Click Here To Review AAPL 1-Month (YTD) Performance Chart (via Google Finance)

    (click to enlarge)Apple (NASDAQ:<a href='http://seekingalpha.com/symbol/aapl' title='Apple Inc.'>AAPL</a>) Stock Price Performance 2008-2013 YTD

    This Apple (AAPL) Stock Price Chart dramatically shows the rise & fall…

    With Apple's Fiscal Year 2013 ending September 28, 2013, there will be just enough momentum from the new product release announcements (we detail them later in this article) to provide some thrust behind Apple's share price in the last 30-45 days of FY Q4. Even with the run-up in AAPL in late August and all of September, FY2013 will be a year to forget. My estimates point at Apple shares trading in a US$490-US$525 per share range during the final week of September 2013. If we use the low-end US$490 per share price as the closing stock price for AAPL in FY2013, we will still be looking at record losses for a company that has had nothing but unreal success for a very long time. At that price, the stock will have had lost roughly 31% of its value over Apple's Fiscal Year 2013. Apple was bound to suffer a pullback year - I would had told you absolutely NOT if you had told me Apple shares would be down 30% in FY2013…there is simply too many incredibly strong fiscal factors that would support the stock after a 10% drop FY-over-FY, 15% at the very most. I was wrong.

    So before we look at what lies ahead for Apple, let me honestly summarize Apple's FY2013. I'm a Realist: FY 2013 was a bad year for Apple on many fronts. Barring a miracle, it will end up being the worst year since FY2008, when Apple shares lost 25.5% FYOY during the financial crisis that crushed almost every companies share price that year. Take out that "Black Swan" 2008 market meltdown, and Apple has had in some time, and in 2020 we will be looking back at 2013 as the culmination in a way of the market's reaction and actual mourning of the passing of Steve Jobs. Let's be honest - nothing Apple has felt the same since Jobs death, and the entire Financial and Technology Industries have felt like they are collectively shaking their heads with the feeling that his death will go down in history as the moment Apple became mortal again, after a decade of God-like innovations and executions and left everyone shaking their collective heads then for a different reason - how in the world are they continually coming up with this Disruptive Innovations that literally are letting consumers know EXACTLY what they want before they even had a clue what that might be. Prescient product releases on this type of level, in a ruthlessly unforgiving Industry where five years can take you from a household name into a forgotten former VIP member of a club that only allows the best of TODAY in - yesterday, last year and the last decade mean absolutely nothing in the space Apple operates in. Creative Destruction in its most definitive form…

    2013 was the year you should give Apple - I firmly believe a substantial retreat in the share price as well as a year of missed estimates, underperformance, eroding KPIs (Key Performance Indicators) and a media environment that gets more and more negative on Apple as each month has gone by in 2013. This was perfectly timed, we will say in Q4 2014…because Apple is about to go off again, changing the dynamics of Apple's existing economic segments as well as, critically, several segments brand-new for Apple.

    I am writing what will end as one of the most bullish calls on Apple out there, but with Apple's Fiscal Year 2013 ending September 28, 2013, there will be just enough momentum from our estimates on new product release announcements to carry AAPL to a FY 2013 closing share price range of US$490-$525.

    In tomorrow's Part II of a three part special report on the major changes ready to rock Apple Investor's worlds, I will describe in detail CY2013's extraordinary Q4 Apple new products and solutions announcements. On Wednesday, the final part of this series will deal specifically with a MAJOR M&A event Apple is getting very close to consummating in CY Q1 2014; this would be so profound a deal, as it has been described in incredible detail to me secretly, it would change everything for both Apple and its competitors. Look out for the next two articles in the series - the surprises begin tomorrow!

    Written by Troy Jensen

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    *Truth in that statement - I reviewed a research brief recently from a major Wall Street Imperial Power that was incredibly detailed, well-sourced and compelling - I take it at face-value that no corporation has experienced the comeback Apple did from 1998 - 2012. This research brief was extraordinary…and indeed, that statement is now absolutely authentic…

    Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I am long AAPL, GOOG. 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.

    Themes: short-ideas Stocks: GOOG, HPQ, YHOO, AAPL
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