From Insanely Great to Pure Insanity – Why the Recent Collapse in Apple Stock Price Spells Opportunity

After last week’s earnings call, Apple stock dropped another 12% in two days to $438/share, for a total of a 37% drop since September 2012. While the stock price has since recovered to $456, that’s still dramatically below where the stock should be trading (IMHO).  Analysts who follow the stock remain bullish, and most analysts continue to maintain buy ratings and price targets well above today’s price.  So why the sell-off after the earnings report?

Let’s look at the facts about the latest quarterly earnings report:

• Analysts expected $13.57 in consensus earnings per share, and got $13.81. Should be "Meets/Exceeds" expectations.  Yet the media chose to run headlines such as "Apple Misses Analyst Expectations." Go figure. 
•  Analysts expected $54.8 billion in revenue, and got $54.5 billion (an increase of $8.2 billion year-over-year). Obviously, no problem there.
• Analysts expected 48.3 M iPhones sold and got 47.8 million. OK, this is a “near-miss”, but it likely has to do with supply shortages of iPhone 5 for much of the quarter (and not inherently weak demand). For perspective, 47.8 million iPhones is a 29% jump from 37 million a year ago and only Samsung has sold more smartphones in a quarter (unofficial estimate for Samsung smartphones was about 63 million sold last quarter).
• Analysts expected 22.8 million iPads sold and got 22.9 million.  Obviously, no problem there.
• Analysts expected 5.3 million Mac computers sold and got 4.1 million. While this is a 22% decline from a year earlier, Apple has been open about discussing supply constraints with the delays in getting new iMacs into production. Unlike previous computer introductions, Apple chose to announce new iMacs long before they were available, which caused many people to defer purchases. Chalk that up as an Apple self-inflicted wound (they should have stuck to their normal practice of announcing new models when they are ready to sell them).
• Analysts expected 12.0 million iPods and got 12.7 million. Obviously, no problem there.
• Analysts expected gross margin of 39.5% and got 38.6%. While this is a slip from a year ago, it is in-line with gross margin two years ago. Should be a “Near-Miss” against expectations.
• Cash balance has swelled to an incredible $137.1 billion from $121 billion last quarter, representing 32% of Apple’s market cap. Obviously, no problem there.

This Q1 for Apple was 13 weeks long while Q1 last year was 14 weeks. One week at the current pace is $4.19 billion in revenue and $1.00 billion in profit. If you equalize Q1 2012 and Q1 2013 for this difference in weeks, revenue growth goes from 18 percent to 27 percent. How many big companies are growing at 27% or higher? And for those that are, I’d be amazed if any of them were trading anywhere near Apple’s amazingly low PE.

So in summary, given the stock was already 25% down from its September high, the results hardly warranted another 12% stock price drop and $58 billion lost in market cap. But where does that leave Apple in terms of the “fairness” of its current valuation ($458 per share and $430 billion as I write this)?

If you take out the $137 billion in cash, Apple’s net market cap is $293 billion. Trailing Twelve Months (TTM) PE (net of cash) is 7.1 and PE for 2013 (based on analyst projections) is 6.1. The TTM PE for S&P 500 average stock is 17.5, so this a 60% discount for Apple versus the market. Apple’s cash flow from operations was a record $23.4 billion in the December quarter and $56.8 billion for TTM -- making the market cap only 5.1 times TTM operating cash flow. Those are bargain basement numbers to my perspective.

For further perspective, consider this:

• Apple generated more revenue in this one quarter ($55 billion) than Google did in all of 2012 ($50 billion)
• Apple is getting close to generating as much revenue in one quarter ($55 billion) as Microsoft does in an entire year ($74 billion)
• For the first time, Apple averaged more than a billion dollars of profit per week last quarter
• Apple generated about as much profit in two weeks ($2.02 billion) as Google did in their entire last quarter ($2.18 billion)
• Apple generated almost more profit last quarter ($13.1 billion) than Google’s revenues in the same quarter ($14.1 billion)
• Amazon last quarter had free cash flow of $395 million compared to Apple’s $23 billion. If Apple had the same multiple of market cap to cash flow, Apple would be worth over $7 trillion (yes, that’s Trillion with a “T”)
• Only three times in the history of capitalism has any company generated more profit in a year than Apple did last year (ExxonMobil has the top three). With a reasonable next three quarters, Apple has a shot at beating the all-time highest ExxonMobil record in FY2013 (even adjusting for inflation).
• The companies that make up the S&P 500 grew their revenue a comparatively anemic 3.8% in the same period (according to Capital IQ) versus Apple’s 22% growth. Further, without Apple’s contribution that growth would have been even lower

In conclusion, if Steve Jobs were alive today he’d likely agree with my conclusion that Apple’s stock price is “insanely low.” Common sense should eventually prevail, meaning that spells OPPORTUNITY.

Disclosure: I’ve owned Apple shares since 1985; I also own Google and Microsoft shares.

IGZO – An Alternate Explanation for Apple Cancelling Display Orders, and Great News For Apple Stock

In December, many Apple analysts and reporters wrote notes of panic based on reports that Apple was canceling display orders for IOS devices in the first quarter of 2013.  This was a major contributor to the collapse in Apple’s stock price, and when the Wall Street Journal reiterated the story on January 14, the sell-off in Apple stock continued.

Here is an alternate view – one that if true suggests this is a strong buying opportunity for Apple stock.

When I attended the Consumer Electronics Show on January 8, the most impressive innovation I saw was only minimally discussed by the extensive press coverage of the show.  It was Sharp’s IGZO display technology.  IGZO stands for Indium gallium zinc oxide, and serves as the channel for a transparent thin-film transistor. It replaces amorphous silicon for the active layer of an LCD screen, and with forty times higher electron mobility than amorphous silicon, it allows either smaller pixels (for screen resolutions higher than HDTV) or much higher reaction speed for a screen – translating to better battery life.  Sharp has been reported to be working with Corning’s Gorilla Glass group, and of course Gorilla Glass is already being used in iPhones and iPads. Sharp is also reported to be one of Apple’s three display providers (along with LG Displays and Japan Display Co.)

For mobile products using IGZO, this delivers more than 80% improvement in power consumption, which translates to smaller batteries, less weight, thinner devices and the ability to incorporate retina displays in devices such as the iPad mini without making them thicker or heavier. This is a hugely important benefit – and a real breakthrough. Apple has been reported to be in discussions with Sharp about IGZO for a long time, but the combination of 1) Sharp now indicating they can scale production and 2) Apple’s desire to drop Samsung as a component supplier, gives further motivation for Apple to make the switch as soon as possible. If that time is now, it would also explain the rumors of an earlier spring/summer iPhone 5S and a spring launch of new iPads including a retina display iPad mini. On top of all this, at CES Corning announced Gorilla Glass 3, which with Native Damage Resistance (NDR) brings a three-fold improvement in scratch resistance, 40 percent reduction in the number of visible scratches and 50 percent boost in retained strength after the glass becomes flawed. If these technologies are as ready for production as Sharp and Corning are indicating, Apple will not want to wait until late 2013 to incorporate both into their products.

This is the most plausible explanation I can imagine for the reports of display order cancellations, and it all comes together in a Eureka moment.  Rather than cause for panic that demand is inadequate for Apple IOS devices, the cancelling of orders of the “old” technology displays instead indicates that there might be a wave of new products hitting the market sooner, a prospect that is not currently in the market’s expectations for Apple revenue and profits. Coupled with the sell-off in Apple’s shares, it is a compelling reason to buy, not a reason to sell.