MorningWord 1/28/15: $AAPL Saucy

by Dan January 28, 2015 9:23 am • Commentary

AAPL’s fiscal Q1 was nothing short of a blowout, and the Q2 guidance which seemed inline-ish would have been a lot stronger if not for the negative effects of foreign exchange. This was not unexpected. I guess the one outlier in the report was the iPhone unit number coming in 7 million greater than the 65 million consensus and commentary that expects continued out-performance in the upgrade cycle.  Yesterday, I concluded my quarterly preview (read here) with the following comment:

I am pretty neutral on the stock, I get the div yield, the balance sheet, the upgrade cycle, the market share gains in Mac, the hope for increased buybacks, PAY & services taking off, wearables being a runaway success.  But one thing I am fairly certain is that the high-end smartphone market is likely to become a lot more competitive very soon, and AAPL for now is an iPhone company and will need to hold onto that margin or the stock will be re-rated very quickly as it was in late 2012/2013.

Near term I probably look to fade a move to $120 post results and would possibly even be a buyer near $100 if it got there for the wrong reasons.

With the stock up about $8 or 7% in the pre-market, I think there is a decent chance the stock finds some resistance at the prior highs near $120.  I like the idea of a short biased trade near $120 that targets a pullback over the next month or so, perhaps near the recent of low of $105.  So for now we know that in Q2 the iPhone will continue to be strong, iPad will likely be weak and we get the Watch that in my opinion will not be a runaway success like the last few new products. Also in April, we get an update to the company’s massive capital return plan. They’ve completed $103 billion of their existing $130 billion in buybacks and dividends.  After that we will start to focus on the S update of the iPhone 6 line in September. And that’s likely it.

If you own the stock, there was NOTHING in last night’s report or guidance to cause you to sell.  And to be frank for the largest market cap company in the world, with the strength of balance sheet, capital return, momentum in product cycle and potential success in a new category the future looks bright. I would add one caveat though. Things looked fairly similar in fiscal Q2 2013, soon after the stock topped out. And at that time investors were ignoring one fairly obvious fault in the near term investment thesis that was right in front of their noses. Universal agreement in the BULL case.  It sounds pretty attractive, and with a below market and peer valuation it almost seems like a NO BRAINER.  I guess if I were long and strong (I am not) I would ask myself why do investors place such a massive discount on the most dominant and amazingly profitable and largest market cap company the world has ever seen??

Last night on CNBC’s Fast Money I played a little devils advocate as we were parsing through AAPL’s results, and to be honest there was little in the immediate results and guidance to pick at. But man, the HATE on Twitter that immediately got thrown back in my face was unreal.  And in some ways reinforces my belief that if and when the stock turns it will likely do so in the manner that it did in 2012/2013.  The stock is crowded with true believers and brokers will have to pry their stock out of their cold dead hands.  And from an investment standpoint, that is a bit unholy.  Do people really only want to hear pundits parrot the bull case?? Isn’t it healthy to pick a few holes in the story?  The funny thing about it is that regular readers of RiskReversal know that I have a fairly balanced view on the AAPL investment thesis, and while I spend most of my time trying to pick holes in the story, it is backed by some fairly well thought out research. We rarely trade it but when we do we’ve had pretty decent success.  But on TV I guess I’m just trolling the trolls.

One last point, given the health of the global economy, and the company registering their highest ASP (average selling prices) ever for the iPhone at $687, does it make sense that the company who expects to get most of its future growth from outside the U.S. will be able to keep up this sort of pace once the upgrade cycle wanes?? And this is a world where Android has north of 80% smartphone market-share with ASPs of about $250.

Prior to today’s price action the stock was in a fairly obvious downtrend from the all time highs in early December. The move overnight changes that but from a trading standpoint I think that the previous highs are a great spot to trim some gains, or even take a shot on a short term bearish trade… stay tuned.