$AAPL defined by the market

The bullish undertones have left. The action has become a cycle-of-negativity to the perception. Bad news is bad. Good news is warped to be bad.  Negative feedback loops are harsh, obviously. Apple has been in it for 8-9 weeks, although the tone has become much harsher over the last two weeks.

The current market action for AAPL is suggesting a few fundamental themes.

1. A reduction in earnings

The stock's multiple is currently at the very low end. The previous times AAPL has hit these trailing multiples, the stock has rallied. (The first time was after they reported Q1 2012 results. The market had to fill the earnings void. The second time was about 3weeks ago.  The third was yesterday.)

When a stock trades below its average trailing multiple (price-to-earnings ratio), the market is suggesting the earnings will decline. A crude assessment of 2012 indicates Apple's average multiple is 14.  'Reversion to mean' theory would have AAPL trailing multiple around 14.  The current trailing multiple is around  11.5.

In order for the stock to regain a multiple of 14, one of two things need to happen: 1. the stock rises or 2. the earnings decline.

With a trailing multiple of 11.5, the market is saying it expects a 18% decline in EPS for AAPL. ([14-11.5 ] / 14 = 17.8%)  Apple has a current trailing EPS of $44.16. An 18% decline means AAPL will have a trailing EPS of $36.21.

Obviously, the question becomes, do the product trends suggest an 18% decline in earnings?

The most important product trends are the iPhone and iPad. Current chatter:

-increased iOS share since the releases of iPhone 5. (US, Worldwide)

-iPad mini seeing really strong demand. (This is a strong positive being tailored as a negative. Instead of being viewed as gaining w/in the smaller screen tablet space, others point to the cannibalizing of the larger tablet. So they view it as a negative. The negative argument is wrong, and it ignores the increased sales volume, along with the general progression of the tablet space. Classic misrepresentation from people not familiar with disruption.)

I exclude analyst reports in the chatter because they are analysts. Here is how vast their reports vary: Last week one analyst reported an increase in supplier activity. Literally days later, another one reported lower activity. (Coincidentally, the latter report came after the China iPhone 5 debut.  Where, aside from the headlines, the debut was the strongest in the iPhone series. So I consider the latter report suspect. More like bullshit, adjusting the target price due to technicals instead of fundamentals.) But these variations in opinions is why I look at raw data and chatter, not analyst opinions.

China iPhone 5 sales is the one area where the chatter is fuzzy. The raw data suggests good progress. Pre-orders for the iPhone 5 were tracking higher than previous models.  But the perception of weak demand, due to the lack of riots allowed for a lot of misleading chatter, including analyst reports (mentioned above), a China based survey suggesting weak interest for the iPhone 5 (contradicting the pre-order data and grey market facts) and the continued talk of lower iPhone share (even though the same decline in share took place in the US market as it awaited the new phone).

The above chatter in no way suggests an 18% decline in earnings. (An 18% decline in earnings also implies the fiscal Q1 2013 EPS will come in some $5-6 below Apple's own conservative guidance. In other words: Not. Going. To. Happen.)

Since AAPL has not properly traded with its growth rate for some time, the above 'reversion-to-mean trailing PE' thesis could be suspect.  Over the last two years, AAPL has traded with its cash growth position. If we are to assume the trading dynamic holds, the stock will either need to start catching up to the company's cash growth or Apple will find itself $20 BILLION lighter.

Again, the chatter certainly does not suggest billions in losses. And multi-billion dollar acquisitions are not in Apple's nature.

2. a company in decline

That is a loaded assumption, with zero support from the fundamentals and chatter.  The above chatter guides us for an earnings expectation.  There is other chatter that guide us to the internal health of the company.  The chatter includes:

- strong developer support

- competitors keep using Apple products due to the ecosystem stickiness

- iTunes revamp and quick adjustment to the tablet market with the iPad Mini showcase Apple's culture of producing quality popular products and services are very much intact.

- A map fiasco (that the iPhone 5 chatter suggests was a non-factor), ultimately led to Google producing a Map App that was far far better than the original. (A little competition goes a long way.)

Conclusion:

With the stock trading near 508, AAPL is discounting a lot of negativity. A level of negativity that would suggest a secular decline in mobile computing growth or a severe disruption to their product lineup.  However, given the overall chatter, the level of negativity the market is projecting is simply not there.

Update: China iPhone 5 sales are no longer "fuzzy". Two million over the weekend.  The UBS Report was bullshit. As for Citi's downgrade right before the numbers were released, looks like they should not have fired Mahaney.

Update 2: chatter has resurfaced regarding Dropbox. If Apple takes the opinions of an influential blogger seriously, this would imply about a $4-8B acquisition. (Dropbox was valued at $4b from its last round of funding in April 2012.) IMO, this purchase would have a positive effect because it would alleviate Apple's need to improve web services.

Trading notes... AAPL, GOOG, jobless claims

1. Anyone selling AAPL because of Google Maps is not worth any further mention of my time.

2. Google Maps is great. Not sure it merits a 2% rise in the stock price at current trailing multiple.

3. Jobless claims rocked.

Dear Eric Schmidt, Shut. Up.

"...this is of the scale of 20 years ago -- Microsoft versus Apple,” said Eric Schmidt. “We’re winning that war pretty clearly now.”

The comment from a recent interview is so loaded, and annoying, it actually made me cringe. Its a fucking shame such a stupid interview followed such an inspiring one from Larry Page.

I am a fan of Google.  When Google was being shitted on earlier this year (by everyone), I felt like the lone defender. Many of the tech luminaries were literally saying Google was the new Microsoft. I found myself defending the ridiculous claims over-and-over again.

Yet, here we are, the Chairman of Google has embraced the Microsoft comparison!

Schmidt has embraced the comparison of a stagnant, copy-cat company, that can barely drive the tech sector forward without the help of a true market leader.

Google is no Microsoft.  Android is no Windows. The comparison of 20 years ago is non-existent. A very lazy person ignores the differences in the hardware economies of today vs 20 years ago. A lazy person ignores the difference in hardware refresh cycle of today vs 20 years ago. A lazy person ignores the 'bring-your-own-device' philosophy sweeping corporate culture effectively destroying the 'forced' use of any OS that was a staple 20 years ago.

As for "we are winning the war pretty clearly now", Android took a hit since the iPhone 5. As of late Oct, there are numbers that suggest Android lost 16% share to iOS in the US. (That's "clearly" winning.)

The reality is that Google is still more vulnerable than Apple during the evolution of mobile computing. Google needs to embrace Apple more due to the above. (Android is good, but not best of breed. Consumers, especially consumers in mature markets, are choosing best of breed.)  A one percent move in Apple market share is a powerful multi billion dollar effect. (Oh, Apple global share has increased from 3.9 to 5.5%.)  Google's quarterly reports indicate a 70% share has no where near the same effect as Apple's 3.9% share.

The numbers do not suggest Google is winning anything. The numbers mean Google has to re-adjust their business model in mobile. Lucky for Schmidt, even those that hate his comments, can see Google shifting their mobile strategy to mimic a company that is "losing". (Motorola unloads most manufacturing capacity, which will lead to better margins.)

Google is very lucky to have Larry Page in charge at this stage of transition.

AAPL - technicals

AAPL has re-gained one technical footing today.

The 5 SMA was breached. (Bullish)

The next step is the 550 area. It represents the weekly support (that frankly should not have been broken given the fundamentals and cash growth Apple will be seeing).

After 550, the next level of resistance is the high 570s via the weekly. (The 14 SMA could act as resistance, but it did not in mid-Nov, so the probability is high that it will not act as resistance this go around.)

Frankly, I can give a rats-ass about the above technicals. The only real level of resistance w/the current strong fundamentals (assuming much stronger supplier sales mean anything), is the 90 SMA (via the daily chart) around 620.

Fiscal Cliff pair trade

(Been debating whether or not to publish this post, only because I am not sure if the highlighted selling below is due to tax selling.)

The general market has been acting very very well considering the threat to the fiscal cliff. (Albeit, excluding the massive declines since Nov 6th.). At the moment, the market is not really worried.

However, internally, we are seeing a concern, most notably displayed by Apple.

AAPL has systematically declined over 20%. It has declined so much so that it is the most inexpensive of the large-cap tech stocks, as per comparative metrics. Much of this decline is being credited to tax selling from long-term holders.

The more and more I think about the tax-selling argument, the more I can see the justification to it. A look at some of the biggest gainers over the last two years include: IBM, ROST, TJX and CHTR. All these stocks started to see declines starting around the same time of the year. VFC is another name that saw a leveling off, but not as much of a decline. (Some outliers are MA and V. Their ascension has not skipped a beat.)

Looks like stock with big gains have been front loading the potential tax hike from 15% to 35%.

As the days close in on the end of the year, and the threat continues to loom, we may start seeing general market weakness. And the names that have been front loading the action see a tamer decline. The pair trade would be to short the SPY and be long names like AAPL.

AAPL the cheapest, again.

In one day, AAPL has regained the title of the cheapest large-cap tech stock. (I highlighted this fact on Nov 15th, and here I am highlighting it again 3weeks later. New info was provided.)

Here is a quick look:

MSFT
PE - 14.42
Forward PE - 8.21
Cash (net debt) ~ $54B (~$6/share)

Microsoft heavily dependent on the declining PC, making its prospects suck. Ballmer is a crappy CEO, confusing the act of copying competitors (in search and mobile) and calling it 'innovative', thereby bastardizing the word.  Forward PE is also suspect due to the poor performance of Windows 8 and rapidly declining PC sales.

IBM
PE - 13.56
Forward PE - 11.34

They are positioned in the heart of the next phase of technology utilizing big data. The cash position is irrelevant with IBM because of their continuous re-purchases and dividend. They have a good balance of healthy financial engineering. I am a big fan of IBM, but have been waiting for their chart to firm up.

INTC
PE - 8.66
Forward PE - 10.18
Cash (net debt) ~ $3B

They are in a rapidly declining sector, and not moving fast enough in mobile. Hence the Forward PE, while already higher than Apple's, is very suspect.  The other day they issued $6B in new debt. IMO, effectively destroying their balance sheet. (I see an HPQ re-run.)

QCOM
PE - 18.15
Forward PE - 13.42

The best supplier positioned to benefit from a sector growing from 1.2B units to 5B units globally.

GOOG
PE - 21.55
Forward PE - 14.83

Google is knee-deep in mobile, social and web services that are growing strongly. IMO, they need to tweak their strategy on hardware because desktop may deteriorate faster than expected. The chart below best highlights my concern. This trend is taking place all over the world. (The chart is from Mary Meeker's year end Mobile review.)

 

AAPL
PE - 12.20
Forward PE - 9.30

Cash: $121B, $127/share, (from last quarter) Remove the cash and the value of Apple's businesses (which are gaining market share) are in single digits, again. SINGLE f-n DIGITS!

Apple is knee-deep in mobile, and the evolution in computing. They are growing their computer business while disrupting the PC and their own computers. The iPhone continues to take global market share.  The iPhone US share has increased. The iPad Mini and iTunes 11 indicate the culture of high quality products outside the era of Steve Jobs.

The company best positioned to continue to take advantage of the mobile trend, is trading at the lowest comparable metrics.

Valuation is obviously a very subjective thing. I can produce a valuation to justify AAPL to trade between $600-700 pending on the method used to value the stock. (Although any of the generally accepted valuation methods can not produce a value for the stock with a 500 handle.) Regardless of the valuation method, the company best positioned for the future of mobile computing (and all that implies) is trading at the lowest comparable metrics to its peers.

AAPL market inefficiency

The craziness of Apple continues. If its rallying, the market players keep talking about the rally. If its declining, thats all we hear about too.

Noise aside, and lets look at recent developments in AAPL:

1. Apple has shown it can successfully create and transition products without Steve Jobs. (Meaning the company culture is very much alive.) We see this in the iPad Mini and iTunes 11.  

The iPad Mini is selling very well. And iTunes 11 has received pretty good reviews. 

2. The iPhone 5 is gaining market share in the US. And is selling briskly in China. (The 4S and 4 are selling well too.) 

3. China will be the largest mobile market, and Apple dominates there. (tablets)

The only known negative for AAPL is that yr-over-yr comparison growth will not be as extreme as the past two years. But the market never rewarded AAPL when it was growing at a +85% earnings clip. Instead over the past two years the market has allowed AAPL to trade with its cash-growth.

The stock price is currently around 550. The above is projecting a modest $8B cash growth from the last quarter. (The $8B is due to historic cash generation from Q4-to-Q1. But the number really should be higher this go-around because of new product launches and expanded reach of those products.)

Based on cash-generation, AAPL's stock price is to be near 650-700. Based on historical trailing PE ranges (around 13.5-14.5) AAPL should be trading near low/mid 600s. (And if looking at the cash-flow, excluding cash and just the businesses, AAPL's stock should be near high 600s/low 700s.)

Any way I look at it, AAPL's stock merits a +600 handle, not a 500 handle.  Regardless of current action, as the quarter begins to end, AAPL's stock will begin to recognize the above.

A consolidation from the recent run was merited. A +20 point decline is not.  AAPL is currently very oversold.