I have not been shy about my confusion over the “It’s Different This Time” crowd in Apple (AAPL) as we are just days away from the release of the much anticipated iPhone 6. Here is a list of my most recent posts on the stock, the sentiment and the products:
Sept 10th: MorningWord 9/10/14: $AAPL Watch Out Below?
Sept 8th: Chart of the Day – $AAPL Turnover?
Sept 3rd: Name That Trade – $AAPL: iWatching Apple
I want to make one very important point. There is one very profound difference between now and the stock’s prior top in September 2012. This time around, the company is a massive buyer of their stock, to the tune of $55 billion since late 2012, and likely another $55 billion in the next two years. But, and there is a HUGE but, the buybacks have merely masked the decelerating earnings growth in that period. So for those who think the stock is sooo much cheaper than it was in Sept 2012, think again.
After $55 billion in shares buybacks and a reduction of 12% of the shares outstanding, the company is supposed to have the same earnings number in FY2014 as it had in FY2012, and trades at a very similar P/E multiple. While their cash hoard is up 30% since, their net income has actually decreased 7.5% and their gross margins are down 5 percentage points in the same period. I know, I know, analysts expect all to rise in fiscal 2015, and just like back in Sept 2012, estimates have risen on the hope of new products. I would simply add that just because Apple announced that they had 4 million iPhone 6 pre-orders, it does not guarantee a blow out quarter and/or stellar Dec guidance. Let’s try to imagine a world where the 5.5 inch iPhone 6 Plus cannibalizes the 7.9 inch iPad mini’s and ultimately wearables take their toll on what I believe is a truly discretionary product, the iPad.
Thinking back now a week later on Apple’s product launch, what we got was a whole heck of lot of catch ups and IOUs. This comes from a guy who got up in the middle of the night last Friday and bought 2 new iPhone 6s. Just because I have an insatiable desire for the new phones does not mean that enthusiasm should carry over to the stock. I don’t believe Apple Pay or Watch will move the needle anytime soon for Apple, and actually believe that any failure poses way more risk to sentiment towards the stock than would a successful launch. Which brings us back to iPhone, as the product accounted for 53% of the company’s total sales in fiscal Q3. This is the only thing that matters in the near term.
It is my sense that once we get Monday’s announcement of total units sold in the first week the stock could be set for a breather as there are NO NEW catalysts expected. The next big announcements will be iPhone availability in China and the Watch launch date. Contrast that expected quiet period with some comments earlier this year by executives, namely Eddie Cue as recently as May:
Eddie Cue – May 2014: “Later this year, we’ve got the best product pipeline that I’ve seen in my 25 years at Apple.”
I would say that this statement is patently wrong. They delivered their best iPhone ever, agreed, but it is basically inline with expectations and with competitive products. But for Apple shareholders there is NO eye-popping innovation (yet) as far as the Watch or Pay goes. Watching Tim Cook’s keynote performance, one can’t help to see a guy who is just trying to hang on, but very aware that to keep the empire on top it will be done in a very different way than has been done by his predecessor. They will actively manage earnings, continue to grow their dividend yield and look to hold onto and hopefully grow their high-end smartphone market share. It is my view that their ability to command an Average Selling Price (ASPs) of more than $600 per phone vs the Android average below $300 will not last much longer.
Just like iPod sales eclipsed computers last decade, then iPhone killed iPod, there will need to be One More Thing, and soon. I suspect it is not Pay, or the current iteration of the Watch. At some point in 2015, investors will become very aware that they are now once again in the middle of a product cycle on iOS, and the mobile hardware businesses will become a lot more difficult.
What I hate most about the stock right now is the sentiment. In my experience on Twitter, you are a total DICK if you talk negatively about Apple. Which is hilarious to me because I remember the last time this Apple stock pundit was the recipient of such venom (spoiler alert: Sept 2012). Many Apple investors are irrationally confident despite the risk that history may repeat itself again. My view very simply is that the news-flow is subsiding, the sentiment is peaking, and there is a possibility that the stock could actually go down from current levels.
Oh and for those of you who think that AAPL’s stock can’t go down because of buybacks, it is important to note that on September 3rd the stock lost almost $30 billion in market cap in a matter of hours:
So here is the trade:
TRADE: AAPL ($99.60) Bought Oct 31st 100 Put for $4.20
Break-Even on Oct 31st Expiration:
Profits: Below 95.80
Losses: between 95.80 and 100 lose up to 4.20, lose full 4.20 above 100
Rationale: Oct 31st weekly will catch the company’s fiscal Q4 results and forward guidance, which aside from next week’s press release stating total iPhone units sold, this will be the next big catalyst. I will look to sell a lower strike put on a move lower in the stock and create a vertical put spread. While I am defining my risk, I wull also look to keep a tight leash on this trade and possibly limit to a 50% loss in premium.