MorningWord 4/24/13: In case you missed it, last night after the close, AAPL reported their fiscal Q2 and guided for the current qtr. Here is a quick summary of results compiled by Business Insider:
- Revenue: $43.6 billion billion versus $42.3 billion analysts’ estimate
- EPS: $10.09 versus $9.98 analysts’ estimate
- Gross margin: 37.5% versus 38.5% analysts’ estimate
- iPhone: 37.4 million versus 36.5 million analysts’ estimate
- iPad: 19.5 million versus 18.3 million analysts’ estimate
- Mac: Just under 4 million million versus 4.1 million analysts’ estimate
- iPod: 5.6 million versus 6.25 million analysts’ estimate
- June quarter revenue: $33.5-$35.5 billion versus $38.6 billion analysts’ estimate
- June quarter gross margin: 36%-37% versus 38.6% analysts’ estimate
Unfortunately for the Bulls, there weren’t too many questions answered and many of the big ones (declining margins, market-share & product innovation) lack any real near term visibility. I think it is safe to say that most analysts and investors expected in their base case scenario that the company would miss expectations for Q2 based on commentary from component suppliers and rumored activity from contract manufacturers in Asia, so the beat is a mild positive. The fact that the company beat on sales, modestly on earnings and on the all important iPhone & iPad units (albeit dramatically lowered expectations since than Jan guide down), but came in at the low end of the company’s gross margin range should continue to stoke fears of product commoditization (think DELL & NOK). The June guidance just rams the fact home, turning this growing trend of cannibilization, leading to commoditization, may be an insurmountable task for in the near future as lower cost competitors like Samsung are perceived to have more, better & cheaper products, and they will continue to use price as the primary tool to undermine AAPL’s once high end mobile/tablet dominance.
Also unfortunate for the bulls, the most anticipated news, the one announcement that was thought to be able to buoy the shares as the company headed into a perceived 2 quarter product refresh blackout, fell flat and largely below some optimistic expectations. The company announced that they are raising their quarterly dividend by 15% ($2.65 to $3.05) and double their share repurchase program through the end of 2015 (equaling $60 billion). While this is obviously a positive from a sentiment standpoint, given the company’s $145 billion cash hoard ($100billion off shore), management finally thinks the stock is cheap enough to buy it back, but many investors who expected some fancy financial engineering in the form of a special dividend or preferred shares will likely be sorely disappointed.
As the conference call started (read transcript from Morningstar here), the stock was up nearly 6% in the after-market, but as CEO Tim Cook and CFO Peter Oppenheimer conducted the hour long call, the stock seemed to drift lower with every word, and settled a couple bucks below where the stock had closed the day. After listening to the call last night, specifically to the tone, and now this morning re-reading the transcript, I can’t help but think that AAPL’s stock may continue to underperform the broad market and its peers for the near future, despite already being down 24% ytd. The tone of the Q&A (read here) was decidedly negative, this coming from many bulge bracket analysts who currently rate the shares a Buy. There was specific focus given to what appears to be rapidly declining gross margins, growth in China that is decelerating, and lack of new product introductions.
We spent a lot of time thinking about (here), speaking about (webinar here) previewing (here) and Enis trading it (here) AAPL’s Q2 report in the last week or so. My conclusion was simple – sentiment had gotten really bad on a stock that just 7 months ago was the most valuable company on the planet, only to see its shares nearly cut in half. But just as the stock overshot on the upside, it is likely to do so on the downside without any material catalysts. There are many reasons why the stock looks cheap at $400, some of the same reasons that bulls argued at $700, but given the dramatic share decline and near investor disgust the stock is getting interesting. BUT, NOT YET. My take has been we need to see capitulation, all out hate selling, when retail investors and fancy institutional ones alike, finally throw in the towel and say get me out! I suspect the stock to continue to drift lower, as it has over the last few months and at some point, for possibly some unexplained reason the price action will start to crescendo. Last week I laid out a Name That Trade for one way I am considering playing for a second half bounce on a selling capitulation (here), and given last night’s news and what I expect the stock’s reaction to be over the coming days/weeks, I am lowering my “BUY of the Century” call to somewhere below $350 (would mark a 50% re-tracement off of the Sept highs.
Simply put, the company needs to continue to innovate, if they do not break into new categories or materially improve existing ones, if this stock has a chance of sniffing $500 ever again. Tim Cook, the guy that Steve Jobs himself said was not a “Product Guy” needs to execute. Refreshing all major product lines in a 5 month period in 2012 was likely the blunder that set the stage for what is turning out to be a disastrous 2013, thats on cook. And just as investors rued the day that Steve Jobs would no longer be the visionary of AAPL, the day that Jony Ive leaves the company to once again make “truly great products” put a fork in this baby, cause it is gonna feel like a nuclear winter in between their next “great product”.
So not to be too downbeat, but yesterday’s result, guidance and cap intro plan do little to get new money excited in mind, and my sense that we will see lower lows that ends in some sort of capitulation is still my call, now just a bit lower, we have more visibility that nothing is going to happen on the product front until the fall. The stock remains cheap, just as it was yesterday and you will see many come up with eye-popping low single digits multiples for the stock ex-cash, thats not the reason to step in yet. The value view, as the only identifiable catalyst needs to be married with sentiment by way of price action, and I believe that is coming to a theater near you in time for the summer blockbuster season. At some point in the near future the stock will be be discounting the apocalypse and then it will just start going up, nailing the exact bottom will be impossible, but catching it as others are panicking will possibly be the “Buy of the Year”!