And now you start buying AAPL

At around 600 USD, I thought AAPL was starting to be priced to perfection and that there would be no reason to try to time the highs. Turns out, AAPL hit 705 USD, level that was just little out there, and then tanked down to 419 USD. In the meanwhile net profits rose to 41.7 billion and cash pile to 137 billion. The ex-cash market cap has approximately halved, but they are doing a bit better than I thought.

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I think it is time to buy AAPL.

The math looks as follows. At current 428 USD per share, we have 402 billion market cap, which drops to 265 billion excluding cash. At 41.7 billion in net profits, P/E is down to mouthwatering 6.35, a really pessimistic figure. It seems to me the investing public is expecting Apple’s bottom line to halve from its current level. Personally, I am expecting to see bottom line at least in excess of 35 billion this year and possibly record profits next year with the economy turning the corner, not to even mention the nominal figures that tend to get a boost from money sloshing around endlessly, and Apple certainly has the competence to turn top line into bottom line.

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It’s time to downgrade AAPL

While I have been overtly positive on AAPL over the last year, the stock has reached heights that no longer offer much upside given reasonable assumptions.

At 593 USD a share, Apple’s market cap is at 553 billion dollars. The stock saw its highs few days ago at over 600 dollars. I am not at all convinced there is a case for investing into AAPL at 600 USD. And since no investors buys a stock based on the idea that it is not worth more than what it is currently, let’s assume that one is seeing Apple at 10 per cent higher.

This leaves us with a target market cap of 615 billion dollars.

The rolling 4-quarter net income is 32.982 billion dollars.

On top of this, the company has 10 billion in cash, almost 20 billion in short-term investments and over 67 billion in long-term investments for a grand total of 97.6 billion in non-operational assets.

This leaves us with roughly 517 billion ex-non-operational assets market cap supported by just short of 33 billion in annual net income.

This translates into a P/E ratio of 15.7, which in itself is not outrageous. SP500 as a whole is trading around 12 P/E on a forward earnings basis. While longer-term averages are higher than 12, such levels would not be consistent with current environment.

For the company to have a P/E of 13 it would have to raise its earnings from 33 billion to 39.8 billion.

Now, perhaps at some point it became reasonable to assume that raising your bottom line by about 7 billion is nothing, which incidentally means raising your pre-tax profit by about 10.8 billion at 35% tax rate, but it is quite a feat. But the problem is that for these valuations to be reasonable Apple would have to retain aforementioned profits forever and while it might be the case that nominal GDPs will continue to grow far into the future, the far more important notion is that Apple’s valuation forces you to assume that computing as an industry does not change much and that Apple will be able to retain its incredible share of smartphone and tablet profits forever.

I don’t have doubts about Apple’s ability to retain high level of operational excellence, carry its day-to-day operations without major hick-ups, create persuading marketing and maneuver in the industry mostly ahead of the curve, but I don’t believe the company would be able to deliver nearly at the current level of profitability if computing and thus the most profitable business models would change markedly in the next 5 to 10 years. I also do not believe they that are able to grow meaningfully from where they are as of now without compromising profitability, and that is what counts. If profits level, valuations will come down. They are not infallible.

Looking at Mountain Lion, it is hardly cutting edge innovation. If Apple thinks that taking existing features and repackaging them as separate apps constitutes innovation, then it is not hard to see at least one way in which Apple could fail. Furthermore, the treatment of corporate and professional customers might end up being the Achilles heel. Or web/cloud services. Or million other things.

There are, of course, plenty of positives as well. For one big one, Microsoft’s entrée to the tablet space looks a bit awkward – nowhere near as natural as Apple’s. Moreover, it is not like many of Apple’s competitors still understand marketing; one wonders when they stop selling crap and quality under the same brand or at least learn to come up with product names that don’t confuse prospective buyers.

This is not to say that the stock might not go higher in the short term or that you should short it, but it seems reasonable to me to seek opportunities elsewhere than to try to exit at the highs.

Just waiting to see which hedge fund blinks first…

Apple Q1 2012 results: record just about everything

Summary:

  • 46.3 billion in revenue
  • 13.06 billion in net income
  • 97.6 billion in liquid assets
  • 17.5 billion in cash flow
  • Americas, Japan, iPad and iPhone showing huge growth
  • Macs: 5.2 million
  • iPhones: 37 million
  • iPads: 15.4 million
  • iPods: 15.4 million
  • Massive beat to Wall Street consensus estimates proving them once again useless

iPhone and iPad showing huge growth. iPhone 133 % y-on-y and iPad 99 %.

Japan and Americas delivering huge growth.

Interestingly the net income exceeds even all previous gross margin figures. Over 13 billion USD in net profit in one quarter.

And lastly the liquid assets that are approaching 100 billion USD.

From the press release:

CUPERTINO, California—January 24, 2012—Apple® today announced financial results for its fiscal 2012 first quarter which spanned 14 weeks and ended December 31, 2011. The Company posted record quarterly revenue of $46.33 billion and record quarterly net profit of $13.06 billion, or $13.87 per diluted share. These results compare to revenue of $26.74 billion and net quarterly profit of $6 billion, or $6.43 per diluted share, in the year-ago quarter. Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter. International sales accounted for 58 percent of the quarter’s revenue.

The Company sold 37.04 million iPhones in the quarter, representing 128 percent unit growth over the year-ago quarter. Apple sold 15.43 million iPads during the quarter, a 111 percent unit increase over the year-ago quarter. The Company sold 5.2 million Macs during the quarter, a 26 percent unit increase over the year-ago quarter. Apple sold 15.4 million iPods, a 21 percent unit decline from the year-ago quarter.

“We’re thrilled with our outstanding results and record-breaking sales of iPhones, iPads and Macs,” said Tim Cook, Apple’s CEO. “Apple’s momentum is incredibly strong, and we have some amazing new products in the pipeline.”

“We are very happy to have generated over $17.5 billion in cash flow from operations during the December quarter,” said Peter Oppenheimer, Apple’s CFO. “Looking ahead to the second fiscal quarter of 2012, which will span 13 weeks, we expect revenue of about $32.5 billion and we expect diluted earnings per share of about $8.50.”

Quick update on Apple

Apple just finished their iPhone event and I suppose the best way to summarize it would be “all the lawsuits now make sense”.

No redesign, no LTE, no larger additional screen sizes and judging by the fact that 3Gs with 4.x is pretty sluggish already, the same thing on 5.x is not very attractive mid-range play especially since it was already on sale for no upfront costs on contract. Sure it’s a top seller in US, but things won’t improve from here.

iPhone 4S will most likely outsell its predecessor in the same timeframe easily, but nothing will stop Android’s rise with the exception of Apple’s very strong position in the tablet space. Round that up with some i-dont-even-remember-anymore updates to iPods and you had a case for dumping the stock – for at least a little while:

The stock is now down only 1 per cent after being down over 5 per cent. Valuation wise I wouldn’t say its too pricey. Take away the 76 billion in cash and you have 265 billion market cap with about 23.6 billion in net income over the last 4 quarters and no debt.

Chart from StockCharts.com as permitted by their policy

Apple reports record Q3 earnings: 7.31 billion net profit, OS X Lion launches today

Apple yesterday reported its Q3 earnings and the net profit came in at record 7.31 billion. 113 per cent sequential growth in iPads. Asia Pacific growth 247 per cent year-over-year.

CEO Steve Jobs:

We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent. Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall.

  • Net profit: 7.31 billion
  • Revenue: 28.6 billion
  • Gross margin: 41.7 per cent
  • Cash: 76.2 billion
  • Debt: 0
  • iPhones: 20.34 million
  • iPads: 9.25
  • iPods: 7.54 million
  • Macs: 3.95 million





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