One More Thing On $AAPL’s Ability to Deliver on High Expectations

by Dan September 5, 2014 4:32 pm • Commentary

Apple is Cheap, I get it.  Trades at the same P/E multiple that it did at the end of fiscal year 2012, the same period that the company introduced the iPhone 5, the last time the stock was at the levels that it is now.  It took two long years to get back here, but is history about to repeat itself with the upcoming launch of the iPhone 6 on Sept 19th? I know that many Apple fanboys, investors, financial analysts, bloggers and pundits are expecting a lot more than just two new phones, but what they actually get at next week’s Sept 9th media event maybe a lot of IOUs on everything besides the 4.7 inch iPhone and iOS8.  The company has played a huge hand in raising expectations on themselves on the product front, as recently as this past May with Eddie Cue at Re/Code’s Code conf and CEO Tim Cook on last years Q4 call:

Eddie Cue – May 2014: “Later this year, we’ve got the best product pipeline that I’ve seen in my 25 years at Apple.”

Tim Cook Oct 2013: “But what I have said that you would see some exciting new products from us in the fall of this year and across 2014.”

Well we are still waiting for the first new product category since the iPad in 2010, and they better deliver, because the options market is expecting fireworks, with the Sept 12th weekly 99 straddle (stock at $99) implying about a 5% move of $26 billion in either direction, which is almost equivalent to the entire market cap of Netflix (NFLX).

BTIG AAPL analyst Walter Piecyk tweeted a great table showing AAPL’s stock performance into and out of product announcement’s during the iPhone era, and generally there is no rhyme or reason, but I’d prob just focus on Sept 2012 given so many similarities:


[For more on what I am expecting please read my post from Wednesday: AAPL: iWatching Apple]

So yo get it, expectations are high, and the stock’s price is back at the highs, and until Wednesday’s 4% sell off from the all time highs, sentiment could not have been higher.  So unless you live in Colorado or Oregon, you probably get the point that some times its just hard to get too much higher than the a matched all time high.

I am not calling a top, or a double top, but this chart is something to keep a close eye on. It is my sense that AAPL will need to exceed expectations to keep the near term momentum going, and over the coming months will need some fairly large product hits, on multiple fronts for the stock to establish a new range above $100:

Apple since Jan 2013 from Bloomberg
Apple since Jan 2013 from Bloomberg

All that being said, heading into what will be a seasonally strong fiscal Q1, buoyed by holiday sales and hopefully multiple new products, I suspect that any weakness in the near term, back towards initial support at $95, and then $90 will be bought.

Late last month I made the argument why Apple is no longer a “No Brainer” (Read Here), which addresses my belief why so many thing have to go right to keep this momentum going, just as they did back in Sept 2012, so I won’t repeat myself.  But I do want to bring up one fairly important point that I hit earlier in the MorningWord:  Peeking Under the Hood of Accelerated Share Repurchases.  While Apple is cheap to many large cap tech peers, it is not particularly cheap to it self over time, even when you ex out the cash.  Here is the 5 year chart of AAPL on a P/E basis:

AAPL 5 yr trailing P/E from Bloomberg
AAPL 5 yr trailing P/E from Bloomberg

Right where it was at the end of Sept 2012, when the company introduced the hotly anticipated iPhone 5 and ended their fiscal 2012. But lets look at whats changed since then.  Earnings about the same, sales up 15%, gross margins down 5% points, cash balance up 36%, and the introduction of debt to the balance sheet.  The balance sheet management is stellar, the company has paid almost $20 billion in dividends (many would argue given their cash flow they could pay out much more), and bought back between $50 and $60 billion in stock in that time period.  So what I want to focus on is the NET INCOME figure that has declined 7% in that same time period.  While earnings look flat, the company has retired ton of shares having a massive positive effect on their earnings PER share (eps), but in my mind leaving the decline in NET INCOME to stick out like a sore thumb.


So the stock is cheap(er) ex-cash than in 2012, but now trades at a market multiple of about 16x trailing earnings, and one could argue that all that cash on AAPL’s balance sheet should not trade at anywhere close to a market multiple and that without massive new product categories double digit sales growth will be difficult to come by off of such a large base and the cash will be needed to manage anything near double digit EPS growth for years to come.

So to sum up, expectations are high, the company is faced with ever-present hurdle of demonstrating their ability to innovate in existing and new product categories, the challenge of growing off of such a huge revenue base and very simply not being susceptible to a massive sentiment shift.

I am huge fan (and customer) of the company and their products, by no means will a flop on an iWatch or any of their initial service offerings (health, payments music) mean the story is over, I just suspect there will be a rotation out of the stock for those who bought it for THIS product cycle. I would love to see a break below $90, back towards the stock’s 200 day moving average, it looks to be a brilliant entry point for longs on purely a technical basis, and would clearly demonstrate a more muted sentiment.