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Saturday, January 26, 2013

the settling... $AAPL

About 10 years ago I started my attempt to trade stocks. I started with about $1,000, and made it into a little over $3,000 in a few months.  I became addicted ever since. I became a market junkie, and a current-events whore.  Throughout those 10 years, there were two distinct trades that have been seared into memory due to the damaged they caused. As of Jan 23rd 2013, there is a third.

1. DNDN - mid May 2007
2. GOOG - 4rth quarter release 2010
3. AAPL - 1st quarter release 2013

DNDN was a very expense lesson in risk management.  GOOG was a kick-to-the-face to not be lazy. AAPL, I am still trying to piece together the lesson.  I got the reaction of the street so wrong, I haven't slept much since Tuesday. (Ever since my senior year in high school, I have dealt with insomnia.  I don't mind it. Lets me keep being somewhat more productive.)

Been re-playing my analysis and assessment over and over again.  The assessment included:

1. Product uptake - This is a continuous observation of the chatter to monitor product trends. Since the launch of the iPhone 5, all the data/chatter (viable chatter, not "some source" articles) suggested, and ultimately realized, a healthy uptake in the iPhone.  The iPad line sold very well.  The Mac supply issues were blatantly stated by Cook in the 3rd Q Conference Call.  The product uptake was decent. To deny the gain in global share for iPhone and strength of the iPad (9.7 and 7.9 inch) is disingenuous to the facts.

2. Flat EPS year-over-year - The comparison to last year was a known issue well before this quarter.  As such, I was not too surprised to see the trailing PE decline from 16 (in Oct) to 14.  (But from Dec to Jan, I was expecting the stock to chill around 560, not 500.)

3. Expectation of Negative Chatter - Planted stories usually hit the wire during times of quiet periods or lulls in product announcements. And since Apple just had a major product release cycle, I was expecting some level of negativity in December. I was not expecting the baseless articles to gain traction into January. (The period of negative chatter was longer than I anticipated, which helped keep the stock near 500.)

4. GM decline - A decline in GM was fairly obvious, and expected.  Last year during Q1 and Q2 fiscal quarters Apple benefited from huge declines in component costs. Margins were very very high.  The comparisons were known to be very rough. Again, adding to the justification to have a contracted PE from 16 to 13-14.

5. Street's perception - The street was at a heightened level of negativity thanks to high level of "component cut" sponsored stories.  The street was already factoring in the negativity due to AAPL's multiple already trading near historic lows. 

6. Technicals - While I was expecting the stock to channel trade in the mid 500 until they reported, they ended up channel trading at 500.  In fact the stock was acting relatively healthy, suggesting a bottoming w/higher lows. Up until the WSJ rumor release the Sunday before Jan 14th, which later remove the fictitious numbers it mentioned.

7. modeling - Because of the technicals, and the lack of pushing the multiple toward 12.5 in January, I ran a series of expectations to assume a miss in estimates and consensus. For instance, one of the assumptions was if Apple guided for around $10eps for the next quarter. That would suggest a trailing eps of 41. Slap a 11.5-to-12.5 trailing PE on 41, and that leads to a stock price of 477-to-492. (Yet AAPL is trading around 450.)

Due to Apple's position in the post PC era, and its huge cash generation potential, I certainly was not factoring a trailing PE below 11.3 (the low range).

Yet here we are.  After the report, and with the stock down, now uber bears want to call a company that had record sales and products sold, a "broken company". (Fuck, if this is the standard of broken, what the fuck is considered working?!?)

The real concerns for Apple are the following:

1. Improved UI (user interface) across its software

2. Improved web services (including iTunes, Apple Apps, Siri, etc)

3. A (more) unified iOS and OS X experience

4. Improve the iCloud experience so that it is a seamless file storage system. (For instance, if I have a file saved on my Mac Air, it would really be saved via iCloud, and I would be able to access that file via my iPad/iPhone. (For this to be seamless I think, #3 needs to be in place.)

There are many other nice-to-haves, but the above are the more critical aspects in order to shift with the evolution of mobile computing.  Back on October 29th, Tim Cook announced management reshuffling to better address the above needs

Aside from the decent quarter, the company has ALREADY positioned itself to embrace the needed evolution. Jon Ive working on UI, Eddy Cue on Apple's services, along with iOS and OS X under one roof via Craig Federighi (the trajectory here is obvious).  In fact, the only clarity we lack is how iCloud will evolve. (But I really do believe iCloud will be far different, and a productive tool, when iOS and OS X start to merge.)

A broken company? Far from it.

I obviously gauged the psyche of the market pretty poorly on Tuesday, and underestimated how severe the level of negativity would drive the stock. But the more and more I think about how I assessed the company and stock, I still do not think I would have traded any differently.

With the current sentiment, I really do not know what to think. Apple is already at stupidly low levels, most likely due to a superficial analysis perspective. And obvious sentiment can take the stock between the 350-425 level.

Where ever the stock goes is any one's guess cause of the poor sentiment. But there was some interesting intraday action, where the stock actually caught bids (around 12:30), and firmed up. (However, about a min before the close, there was some funny business.)

Curious as to who is stepping up? Could institutions be coming back or is Apple stepping up and loading up on their $10billion stock buy back?  Why wait three years to make the purchases, when so much can be bought now for such a low price.

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