MorningWord 7/30/13: How Do You Like Them $AAPL?

by Dan July 30, 2013 9:30 am • Commentary

MorningWord 7/30/13:  As Enis noted in his post Friday afternoon detailing his bullish AAPL trade (here vs Bearish QQQ position), it appears, for the time being, that AAPL’s stock  may have reached a sort of equilibrium as expectations and sentiment have normalized a bit.   Now investors have a bit of a wait and see for the next month as they will soon expect a press release in early September announcing a press event for the next iPhone (last year AAPL sent out an invite to the press on Sept 4th for a Sept 12 release event here) and this has the potential to be a fairly market moving event, one way or the other.   There have been recent rumors that AAPL is testing larger screen sizes for the next iteration of the iPhone, but if that’s not ready in time and the company does not have an update to the existing model in late Sept or Oct, the stock would likely get hit.

The major tenets of the bull thesis suggest that the company will very soon release new INNOVATIVE products after what can safely say has been a lull of refreshes, massive share repurchase, dividend yield higher than the 10 year treasury yield, earnings deceleration stabilization, rock bottom valuation and the potential to ship 10s if not hundreds of million low end iPhones in emerging markets, namely China Mobile.  Oh and maybe, just maybe, the company has “one more thing” up its sleeve whether it be an innovation in the living room or a sleek new wearable device at a price point that could create insatiable demand for the holiday season.

That all sounds great, especially for a stock that has massively under-performed the broad market and most of its large cap tech peers ytd.   But the major tenet of the bear thesis, is that the poor price action and subdued valuation reflect the reality that AAPL’s declining product margins are not likely to to move back up above 40% anytime soon as the company readies to take on the mid to low end smartphone market, and as evidenced by recent results and commentary from Samsung, NOK, BBRY, HTC & LG that the high end smartphone market in the developed world has tapped almost every consumer willing to buy a premium device.

This morning as I write, the stock is trading at $450 in the pre-market, approaching a very key technical resistance and psychological level that the stock has not been able to hold in a meaningful way all year since breaking below on its earnings gap back in Jan.  With no new company specific news expected in the coming weeks, coupled with a stock that has proven in no way to be correlated to broad market moves, the stock has been a safe place to park money in the last week as stocks like MSFT, INTC, GOOG, DELL & YHOO have all seen outflows.  On that front, one of the most interesting take-aways from AAPL’s Q3 earnings report last week was that the company has been buying back their own stock hand over fist, $4 billion in the last quarter in the open market and maybe as much as $12 billion through and accelerated buyback (here).   If that is true, than AAPL, has nearly completed a quarter of the $60 billion share repurchase announced in April (an additional $50b was announced with increased dividend to existing here).  They either know a heck of a lot more than we all know about future catalysts (which we should suspect) or they can’t find anything better to do with this cash other than to pay dividends and buy back their own shares.

One way or the other, the stock has hit an inflection point, having broken $400 on two occasions in the last 4 months, and held, and now looking as if it wants to break out, with a fairly motivated and smart buyer (the company) nipping at his heels.  But again, if low end iPhone is the announcement in Sept, and possibly an iPad Mini upgrade, investors are likely to be disappointed, and if the iPhone upgrade is just the evolutionary S upgrade (think same form factor with a software gimmick Siri, Maps etc) with same hardware and already previewed iOS7, then the market will most definitely be disappointed.  Between now and then, expectations will only rise, which could be consistent with the stock rising, if that is the case then we take another look at would could be an increasingly important time period prior to Q4 earnings in late Oct.