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Avi Fogel
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Avi is a board member at New York Angels, and runs its education committee. He's also a board member at the Israel Venture Network (IVN), a social venture / philanthropy organization, a board member at Localytics - a leading mobile app analytics company and a board member at CoursHorse - a NYC... More
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  • Apple (AAPL) - All In 3 comments
    Jan 9, 2013 4:34 PM | about stocks: AAPL

    Apple (NASDAQ:AAPL) - All In

    This article presents our rationale why Apple shares now present an entry opportunity, for profitable returns, not seen since December of 2011. The article includes an assessment for a substantial top line and bottom line beat in the upcoming earnings release on Jan 23rd, where it seems reasonable that the share price will break through the double bottom base pivot at ~$595 for a new breakout post earnings.

    A combination of several factors has put pressure on AAPL shares since September, 2012.

    · Year-end selling to retain the 2012 tax levels on profits

    · Tax loss selling for those that rode the stock down

    · Shorts piling on tax based sellers

    · Supplier "checks" by several sell side analyst firms

    · Various operational concerns raised by many of the same sell side analysts, such as cannibalization of iPad by iPad-Mini, supply constraints for iPhone 5 and iPad-Mini, soft demand for iPad in FQ4/'12, pricing of iPad-Mini being too high and concerns about Apple losing its mojo with the passing of Steve Jobs.

    While many of the concerns have been addressed well in previous articles, I'll just mention several additional points mitigating some of these:

    iPad cannibalization by iPad Mini - While iPad-Mini is rolling off the shelves in China and other lower income geographies, indications are that Mini will not exceed 25%-30% of the total, as hinted to by theanalysis published by Localytics

    iPad-Mini pricing - Despite such pricing - numerous reports have since suggested that iPad-Mini can't be manufactured fast enough, and that it is a major hit in China

    Supply constraints - since late November, deliveries on iPhone 5 were from stock and iPad-Minis were for delivery within 1 week.

    The analysis here will focus on 2 areas:

    1. Supply "checks" vs. demand-side projection

    2. The company's projected performance this quarter, based on its historic performance

    There are additional important considerations regarding the relative strength of AAPL's P/E and PEG (P/E to Growth), as compared to AMZN, GOOG, QCOM, which we will not address here.

    While you never really know, and risks remain, AAPL now seems to present an unprecedented entry opportunity for very substantial gains, in the short, mid and long term, and may be one of those rare opportunities one gets, for an "all-in" investment. The "all-in" is used as a metaphor, and not as an actual recommendation. Please perform your own risk/reward assessments for any allocation of your investments into Apple.

    Supply checks vs. demand-side data

    All the projections used as rationale for estimate reductions were a result of what the sell-side analysis call "supply chain checks".

    What are these checks? As a Taiwanese or Japanese supplier to Apple, what would the motivation be to provide accurate information? Besides breaching confidentiality agreements with Apple and risking its business, the only thing such a supplier might benefit from is if, as a result of their information, the stock swoons, and they can pick it up cheaply. Why in the world would the suppliers care about accountability, and why are sell side analysts willing to bet their projections on such illegal info sharing? makes you wonder…

    We are all better off relying on demand side information than this questionable supply side "data" which even if accurate is limited at best - since AAPL continuously modifies its supply chain and does on-going supplier adjustments for what is probably the best Just-In-Time (JIT) product manufacturing process on the planet.

    So what does demand side data show for the December quarter?

    AT&T smartphone sales bode well for AAPL from 1/8/13

    Apple steals throne from Android from 1/7/13

    Large iPad - the preferred tablet for enterprises from 1/7/13

    Apple's app store downloads have increased to a total of 40 billion with payout to app developers accelerating from 1/7/13

    As a matter of fact, between January and July of 2011, Apple reported that 5 billion app download took place, which equates to 830 millions download per month. In 2012, 20 billion downloads took place over the 12 months, equating to 1.67 billions download per month - so downloads are increasing, and with it monetization for Apple and its developer eco-system

    Largest number of iPhones ever - 2M, sold in China over opening week-end - from 12/16/12

    Morgan Stanley's Katy Huberty on Customer Demand for iPhone and iPad - from 12/17/12

    Apple's iPhone takes 68.2% of new small & medium business smartphone activations - from 12/19/12

    Record AT&T smartphone sales bode well for iPhone - from 12/5/12

    IBM: Apple's iOS dominated holiday shopping, 330% greater than Android - from 11/25/12

    Hardly indications of a company in decline or stagnation, but rather a continued very high growth player and a very successful potential FQ1/'13.

    History of projections vs achievements

    Given the strong demand-side indications, the excessive bearish sentiment and the larger short interest since mid-November 2012, we project rapid ramp-up for the stock, post earnings, resulting from a massive revenue and EPS beat for AAPL in this FQ1, 2013, as can be seen in the leftmost column - with revenues of $61.48B, 58 million iPhones sold and 26 million iPads, of which 10 million are projected to be iPad-Minis. ASP's for the phone and tablet, include accessories.

    Of the $61B+ in revenues - $37.7B will be from iPhone sales, $11.78B from iPad sales and $12B from other revenue.

    Enclosed below is a table showing 11 quarters worth of data, including:

    · Actual, company projected and analyst consensus on revenues

    · Actual, company projected and analyst consensus on EPS

    · Over(or under) achievement vs. company projection and analyst consensus on both revenues and EPS

    · Gross margins - actual and projected

    · Unit sales of iPhone, iPad, MAC, iPod

    · iPhone and iPad quarterly revenues and ASP's

    · Year over year (YoY) growth for revenues EPS and unit counts

    Given the pent up demand held back in FQ4/'12 for iPad and iPhone, due to imminent releases of iPhone 5 and iPad Mini - expectations are for a large "make-up" for that pent-up demand, like we saw in FQ1/'12, after the release of the iPhone 4S. We are therefore projecting YoY iPhone unit growth in FQ1'13 of 57, in line with FQ4/12 YoY growth - resulting in 58 million units. Similarly, based on demand indications as outlined above we are projecting a 69% YoY unit growth in iPads, resulting in 26 million units.

    These numbers drive a revenue over-achievement relative to company projection, of 18.2% - within the range seen in FQ1/'12 (25.2%) and FQ1/'11 (16.3%).

    EPS over-achievement relative to company projection, is 24.3% - lower than seen in FQ1/'12 (49.1%) and FQ1/'11 (34%).

     

     

     

    12/12

    9/12

    6/12

    3/12

    12/11

    9/11

    6/11

    3/11

    12/10

    9/10

    6/10

     

    FQ1/'13

    FQ4/'12

    FQ3/'12

    FQ2/12

    FQ1/'12

    FQ4/'11

    FQ3/'11

    FQ2/'11

    FQ1/'11

    FQ4/'10

    FQ3/'10

    Rev ($B)

    61.48

    35.97

    35.02

    39.19

    46.33

    28.27

    28.57

    24.67

    26.74

    20.34

    15.70

    Proj Rev ($B)

    52.00

    34.00

    34.00

    32.50

    37.00

    25.00

    23.00

    22.00

    23.00

    18.00

    13.40

    Rev OvrAchv(%)

    18.2%

    5.8%

    3.0%

    20.6%

    25.2%

    13.1%

    24.2%

    12.1%

    16.3%

    13.0%

    17.2%

    Rev Cons ($B)

    54.58

    36.40

    37.30

    36.30

    38.70

    29.20

    24.80

    23.30

    23.80

    18.40

    14.60

    Rev Cons Ovr(%)

    12.6%

    -1.2%

    -6.1%

    8.0%

    19.7%

    -3.2%

    15.2%

    5.9%

    12.4%

    10.5%

    7.5%

    EPS ($)

    14.61

    8.67

    9.32

    12.30

    13.87

    7.05

    7.79

    6.40

    6.43

    4.64

    3.51

    Proj EPS ($)

    11.75

    7.65

    8.68

    8.50

    9.30

    5.50

    5.03

    4.90

    4.80

    3.44

    2.39

    EPS OvrAchv(%)

    24.3%

    13.3%

    7.4%

    44.7%

    49.1%

    28.2%

    54.9%

    30.6%

    34.0%

    34.9

    46.9%

    EPS Cons ($)]

    13.33

    8.75

    10.35

    10.03

    9.79

    7.31

    5.81

    5.35

    5.38

    4.05

    3.08

    EPS Cons Ovr (%)

    9.6%

    -0.9%

    -10.0%

    22.6%

    41.7%

    -3.6%

    34.1%

    19.6%

    19.5%

    14.6%

    14.0%

    Net Profit ($B)

    13.53

    8.22

    8.82

    11.62

    13.06

    6.62

    7.31

    5.99

    6.00

    4.31

    3.25

    GM(%)

    38.5%

    40.0%

    42.8%

    47.4%

    44.7%

    40.3%

    41.7%

    41.4%

    38.5%

    36.9%

    39.1%

    Proj GM (%)

    36.0%

    38.5%

    41.5%

    42.0%

    40.0%

    38.0%

    38.0%

    38.5%

    36.0%

      

    iPhones (NYSE:M)

    58.00

    26.90

    26.00

    35.10

    37.04

    17.07

    20.34

    18.65

    16.24

    14.11

    8.40

    YoY growth (%)

    57%

    58%

    28%

    88%

    128%

    21%

    142%

        

    IPhone Rev ($B)

    37.70

    17.10

    16.20

    22.70

    24.40

    11.00

    13.30

    12.30

    10.47

    8.00

    5.30

    IPhone ASP ($)

    650.00

    635.69

    623.08

    646.72

    658.75

    644.41

    653.88

    659.52

    644.70

    566.97

    630.95

    iPad

    26.00

    14.00

    17.00

    11.80

    15.43

    11.12

    9.25

    4.69

    7.33

    4.19

    3.27

    YoY growth (%)

    69%

    26%

    84%

    152%

    111%

    165%

    183%

        

    IPad Rev ($B)

    11.78

    7.50

    9.20

    6.60

    9.10

    6.90

    6.00

    2.80

    4.61

    2.80

    2.20

    IPad ASP ($)

    453.08

    535.71

    541.18

    559.32

    589.76

    620.50

    648.65

    597.01

    628.92

    668.26

    672.78

    MAC

    5.00

    4.90

    4.00

    4.00

    5.20

    4.89

    3.95

    3.76

    4.13

    3.89

    3.47

    iPod

    11.00

    5.30

    6.80

    7.70

    15.40

    6.62

    7.54

    9.02

    19.45

    9.05

    9.41

    Other Rev ($B)

    12.00

    11.37

    9.62

    9.89

    12.83

    10.37

    9.27

    9.57

    11.66

    9.54

    8.20

     

    iPad-mini

    9/12-iPh 5

     

    iPad 3

    10/4 - iP4S

    1st Q closed

     

    iPad2

      

    iPhone 4

    Events

     

    iPad 4

      

    10/12-Icloud

    by Cook

         
                
                
                

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

    Additional disclosure: My long position in AAPL is using mid-term call-option bull spreads

    Disclosure: I am long AAPL.

    Additional disclosure: Using mid-term options

    Stocks: AAPL
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Comments (3)
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  • johnatan hammer
    , contributor
    Comments (32) | Send Message
     
    i believe you are wrong.
    apple lost it's "coolness".
    it treated clients poorly and it will pay the price in shares.
    i wrote a post in my instablog (don't worry its short) and you are welcom to read it and than tell me what you think on my point of view...
    9 Jan 2013, 05:55 PM Reply Like
  • Avi Fogel
    , contributor
    Comments (20) | Send Message
     
    Author’s reply » Thanks for your comment, Jonathan.
    I disagree with your conclusion for the following reasons:
    * AAPL as well as other technology companies see the same technology curve - where products are first very unique, cost more to make, and have limited eco systems
    * over time the coolness winds down as does the uniquenes, but the eco system and with it the stickiness of customers and developers increases, as does positive cash flow.
    * We saw this happen with iPod, which still continues to generate fantastic free cash flow
    * As it did with iPod, AAPL is going downstream with iPhone and iPad, to cater to larger populations, although they will still maintain their design beauty, as compared to others
    * They have a long time, in my opinion, at least 18-24 months, before they have to come out with a new paradigm product, which might very well be the new "integrated" living room / entertainment room solution, with iCloud tying it together (where is Samsung's iCloud, by the way?)
    * Until the release of their new paradigm product, they will continue to reap huge amounts of cash
    10 Jan 2013, 01:39 PM Reply Like
  • johnatan hammer
    , contributor
    Comments (32) | Send Message
     
    maybe you're tright, but i am looking at it from a traders point of view,
    and i believe that the chances are higher that apple will reach the $400 price level before it will continue any further, time will tell which one of us was right.
    10 Jan 2013, 05:17 PM Reply Like
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