I assume that some of you, like me, are reading Becoming Steve Jobs by Brent Schlender. Besides Walter Iasscson’s authorized biography, this book seems to be the account of the Jobs life and accomplishments that most accurately reflects the memories of those who knew him. It’s a great book but its ovbious that Schlender was and is a huge Jobs admirer so it is told from that perspective.
That said, the rise and fall and rise again of Steve Jobs is a story that will be told for hundreds of years, much like we speak of early industrialists. One theme throughout Becoming Steve Jobs is that Jobs kept pushing himself and his team to figure out what’s Next, which seemed to accelerate a bit after his cancer surgery in 2005. This was the period where he set out to really change how the world thinks about and uses computing devices. Not too differently than when he started out the mid 1970s and continued into the 1980s, but very different than what he tried to do with mere aesthetics in the 1990s. What came next is stuff of legend. A company that redefined computing first with the iPod but really changing the game with the introduction of the iPhone and the iPad in 2007 and 2010 respectively. Two products that very shortly will top 1 billion combined units sold and accounted for a little more than 70% of AAPL’s calendar 2014 sales of $200 billion.
So whats Next for AAPL?? Obviously Wearables. That’s likely it for the next few years. Pay is a nice feature, but I have not used it yet, and I have 4 iPhones in my home and have continued to use other forms of e-pay. I am sure the bulls will be correct that this will be a great business for AAPL at some point, but not yet. And it’s certainly not likely to move the needle anytime soon on their expected $225 billion in sales this year. So it’s got to be hardware that leverages off of their existing ecosystem. And I hate to tell you but their first foray into Wearables will be underwhelming (as many of their competitors first takes on the category were), and I would be shocked if the first edition can achieve some of the increasingly optimistic unit expectations for 2015.
My fairly nonscientific prediction is that the Watch disappoints on multiple levels. But more importantly, it will highlight what bulls should fear as an end of a long period of hyper innovation at Apple.
So let’s look at the stock. This month we will get the launch of the Watch on April 24th, the company’s fiscal Q2 earnings on April 27th which should include first weekend Watch sales and an update to their capital return plan where the expectations may actually be the highest among all three events. Q2 is gonna kill, Q3 guidance could disappoint as iPhone 6 upgrade cycle wanes. Watch likely disappoints on initial units and reviews and for capital return will likely disappoint most optimistic expectations but they will do they need to do between accelerated and regular buybacks to keep the stock stable.
The 1yr chart below is interesting, it has held the uptrend, but the stock has lost momentum since topping out in late February:
The breakout level of $120 will be a massive test for the stock on the flip-side, coupled with the downtrend that has been in place for the last month and it appears that upward momentum is waning in front of some very crucial news events in the coming weeks.
The point of this post is not to hate on AAPL. It’s merely to play a devils advocate a little. Sentiment is very hot.
I do think the downside risk in the stock is fairly muted given the existing product cycles. They have $178 billion in cash on their balance sheet afterall. I suspect the stock sees massive support at $110, which seems like a long ways away.
With the stock around $125 the May 1st weekly 125 straddle (that catches all of this news) is offered just below $10 suggesting that options traders also agree that $110 seems like a long shot. The move looks cheap in my mind. I would be surprised if the stock melts up from here, and equally surprised if the stock were to lose more than 10% in the coming weeks. The risk / reward seems fair in either direction, yet the sentiment seems rich at a time where momentum is waning.