MorningWord 7/22/15: $AAPL – You’re Not a Beautiful and Unique Snowflake

by Dan July 22, 2015 9:46 am • Commentary

Apple.  Lots of peeps are scratching their head about the stock’s reaction so far to what by all accounts was a very good quarter.  The stock is down about 6% because the company sold 1 million or so less iPhones vs ever growing expectation of about 48 million.  I think it is important to remember in the March quarter the company sold 61 million in the previous quarter vs expectations of 58 million.  Gross Margins were at the high end of expectations, as average selling prices (ASPs) increased a touch sequentially to $660 and the year over year revenue growth in China continues to be staggering, up from 70% in the March quarter to up 112% yoy in the quarter just reported.

So what’s the problem?  First things first I think it is safe to say that sentiment was white hot into the print as in the hours before the results the stock traded within 1% of the all time highs made in April, capping an eight day, 11.5% run. Aside from the fact that the investment world was in universal agreement that Apple was going to break out to new highs, the report highlighted a few potential headwinds in the coming month/quarters.

1. China – YoY revenue growth is eye-popping, but it’s important to remember that 4g subscribers at mobile carriers are volatile month to month. There was tremendous pent up demand for larger phones in the country and commentary from other U.S. multi-nationals could suggest past performance may not be indicative of future results.  Oh, on a sequential basis sales in China had the largest percentage decrease quarter over quarter by country/region:


2. Watch – as expected was a dud and will continue to be in my opinion until we see the next iteration, AAPL will likely be a winner in wearables, but not yet. The product should have been in beta for fanboys, that’s the market for the current device. (my thoughts here)

3. Services & Other – record quarter there, but in my opinion it is a hodge podge of unproven eco-system stuff.  Music launch could cause some cannibalization of iTunes sales near term, Pay, I have still yet to use. but its important to remember that sales from this segment, which included Watch was less than 10% of the whole, and will not move the needle for a very long time.

4. iPad – spin it anyway you like, and be hopeful about Enterprise uptake with the IBM deal, but we hardly know ya!

5. Cash Money – well its $202 billion balance is staggering, greater than its total sales in fiscal 2014, but more and more of it is overseas, and expect to see their debt load of $54.4 billion in increase to continue to fund buybacks and dividends which has been over $200 billion since their cash return started a few years ago.

So you get it, it’s the iPhone company. The company said that less than 30% of its installed base has upgraded to the 6 or 6 plus, and this device with the upcoming S series in Sept will have a very long upgrade cycle. But its begs the question, as AAPL expands geographically, Do they have an impending Rich People Problem?? I wrote about this back in March (read here).

There is one really important point about iPhone and why it may be different this time, the upgrades to the device, aside from processing power, storage and camera are becoming less innovative, with less incentive to upgrade and less differentiation from Android phones.  China could pose a major speed-bump if the stock market volatility causes a reversal of a wealth effect that has have been a massive benefit to AAPL. New found stock market wealth likely found its way to aspirational products like iPhones as the stock market rallied 100% over the last year (read more here).  I am also hard-pressed to see AAPL maintain this massive gap in ASPs over Android as smartphone penetration becomes more saturated in emerging markets.

In late June in this space I asked the question Is $AAPL Dead Money?, and it really could be, and no longer the no-brainer that some very large investors have been vocal about.  Is there an embedded put with the cash balance and the company’s ability to fund aggressive buybacks with very cheap money? Obviously, but let’s see how the stock acts when Carl Icahn tweets about how he wants bigger buybacks at some point today.

I would also add that consensus expectations for fiscal 2016 is for 7% earnings growth and only 5% sales growth, the slowest in more than 10 years.  The stock trades below a market multiple, ex cash even cheaper, but can you imagine what earnings growth would have been last year without the $50 billion in share repurchases?

Barring a market meltdown, or a massive sentiment shift like we saw from the prior highs in AAPL post the iPhone 5 launch in September in 2012, I suspect that $134 should serve as formidable technical resistance, and $110-ish solid technical support. So that’s the range I’d play:

AAPL 1yr chart from Bloomberg
AAPL 1yr chart from Bloomberg

But lets be cognizant of recent history, and the 45% peak to trough sell off from Sept 2012 to June 2013 from a similar sentiment high that caught most AAPL faithful off guard, and most were very late to identify the turn:

AAPL 2012 to 2014 from Bloomberg
AAPL 2012 to 2014 from Bloomberg

This is a theme I’ve been hammering since the Spring when the “You own Apple you don’t trade it” crowd seemed to get really overconfident. This company is unique for sure, but its stock can go down (or become dead money) when sentiment gets too high just like any stock.  I am not for a second suggesting that the stock is on the precipice of a 45% decline, but it certainly could correct despite (or maybe because of) the continued universal bullishness.

Consider this post a bookend to one I wrote in April: AAPL: You Are Not Special. You’re Not a Beautiful and Unique Snowflake