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Wednesday, January 23, 2013

build you up, to tear you down... $AAPL

What went wrong?

Pick a reason, any reason, and let it be so.  Ignoring the arbitrary opinions of the many, lets look at the numbers.

Q1 2013:

1. Revenues miss the consensus expectations by $300M.

Although Apple beat their own guidance by +2 Billion, for a company that just produced $54 BILLION in one quarter, that is a 0.5% miss. Which means a sneeze in the currency market could have caused it to "miss". Also:

-iMac sales were low, too low. Here were the real supply issues. This is an obvious factor that caused analysts to miss consensus revenue estimates.

-iPad mini constraints. If Apple was able to improve supply constraints on the iPad Mini (to which it is still constrained by a 1week shipping time), Apple would have beat on revenue.

Does this level of miss merit a 10% decline?

2. Product expectations.  Apple has been declining for the past 3 months due to vague, obviously bullshit, "factory order cuts".  Analysts started declining their expectations since the order cuts started to be made.  They then raised their iPhone expectations because the actual numbers from Verizon came in pretty strong.  The negative sentiment was already being factored in, and should not have had a big effect on earnings. (I liked how Cook called major media outlets idiots, in far more political terms, but idiots non-the-less.)

Whatever the twist to product expectations, record sales are record sales.  The numbers were decent. (Especially for a stock, prior to this report, trading at the very low-end of its trailing PE.)

3. Gross Margins were around expectations. Again, decent. (Especially for a stock, prior to this report, trading at the very low-end of its trailing PE.)

4. Beat earnings (eps) consensus estimates. Obviously good. (Especially for a stock, prior to this report, trading at the very low-end of its trailing PE.)

5. Next quarter expectations.  Apple obviously lowers expectations.  The consensus was $45billion, they lowered it to $41-43billion.  Around a 10% decline, but is it anything any Apple investor is not accustom to?

Apple introduced two new expectation management tools during the CC:

a. No eps guidance. 
b. Blatantly squashing the notion of "softball guidance" expectation. (I believe it was at this time the stock started to really break down.) 

Everyone already knew earnings in general were not going to keep growing at +85% clip.  And that EPS, from last year, was going to be flat. Wall street never rewarded that level of growth, and now wall street is punishing decent revenue growth. (But the stock, prior to this report, was trading at the very low-end of its trailing PE.)

Does a new level of expectation merit a $50 billion decline in market capitalization of a company that grew their cash position by $16billion?  Maybe, if the stock was trading near 600 prior to the report.

Whatever the reason, the stock declined and now we wait for price discovery, albeit painfully.  Where will the street get interested? Prior to after hours decline, Apple was already trading at that 'interest level'. Apple's low-end trailing multiple was around 11.5.  

Looking at the after hours decline (near 460), Apple has the following multiples:

Trailing PE: 10.45
Forward PE: 9.5 (assuming a 10% eps growth from 2012)

Cash position: $137.1billion
Cash per share: $144.7
Share price (ex cash): $315
Trailing PE (ex cash): 7.15 (eps of $44.1)

I am not expecting crazy growth, but I am expecting wall street to give credit where credit is due, and give Apple a proper multiple. (All considering their forefront position into the Post PC era.)

Apple may need to take a page from IBM's play book. Being so large, Apple needs to get more involved with healthy financial engineering.  I thought the dividend and buybacks announced last year would have been enough to maintain between 12.5 - 14. Since the stock is no longer being rewarded for its cash growth, Apple needs to put that cash to work. ($16 billion growth in cash! 16. Billion.)

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